Weekly Market Update: February 27, 2023
The Federal Reserve still has more work to do in its battle to tame inflation. That is because both the January Consumer and Producer Price Indexes indicated that prices remain at elevated levels. Both came in above expectations on both a month-to-month and 12-month basis, with the latter still well above the Fed’s long-term target range of 2%.
Senior central bank officials will likely be data-driven in making monetary policy decisions. Given this notion, it is not surprising that the hotter price data and strong gains in January employment and retail sales brought more hawkish commentary. The market now appears to be more in line with the Federal Reserve’s thesis that the federal funds rate needs to go above the 5.00% mark and remain comfortably above that level for an extended period to effectively fight inflation. Treasury market yields jumped on this view and that took the starch out of the early-year stock and bond market rallies.
Fourth-quarter earnings season has been uninspiring. True, the results have been better than some feared, with 80% of the S&P 500 having reported results as of press time. However, profits are still forecast to have declined by mid-single digits during the final three months of 2022. The near-term profit outlook also is underwhelming, with far more companies issuing negative than positive prognostications for the next few quarters.
The full effect of the Fed’s restrictive monetary policy course on the U.S. economy is yet to be realized. The consumer has been the backbone of the recent gross domestic product (GDP) expansion, but how long will that last? The Federal Reserve Bank of New York recently reported that U.S. consumer credit card debt rose to a record high of $986 billion in the December quarter, with an average interest rate of 21.6%. This may lead to some spending hesitation down the road, which would likely add to the growing concerns about corporate profits.
Conclusion: With S&P 500 companies trading at around 18 times earnings, valuations look a bit elevated under the circumstances, and this leaves stocks susceptible to selling on any unsettling news.