Weekly Market Update: March 13, 2023

Alex Ralicki |

The Federal Reserve’s battle to tame inflation is proving arduous. Fresh on the heels of a stronger-than-expected Personal Consumption Expenditures (PCE) Price Index reading, the gauge of inflation most closely watched by the central bank, the Labor Department’s report on fourth-quarter productivity showed a bigger-than-anticipated (3.2%) increase in unit labor cost in the nonfarm business sector. Unit labor cost measures how much a business pays a worker to produce one unit of output.

A tight labor market also gives the Fed more wiggle room to continue tightening the monetary reins. In addition to fostering full employment, the central bank’s dual mandate is to promote stable prices. And with recent weekly unemployment claims still running near historic lows, a sign of a healthy labor market, the sector may be strong enough to withstand additional, albeit more measured, interest-rate hikes. It should be noted that most senior officials of the Fed, which recently lost a prominent dovish voice in Vice Chair Lael Brainard to President Biden’s Economic Council, are apt to push the federal funds rate north of 5.00% and keep it above that level until inflation cools considerably.

This comes as questions persist as to whether the full effects of the most restrictive monetary policy course in four decades have been seen. True, the labor market has held up well in the face of a shrinking money supply and less business investment, but there are signs of stress in manufacturing and housing. On the latter front, February mortgage applications were 44% below the year-ago same period, falling to a 28-year low.

Fourth-quarter earnings season also suggested growth is slowing. Although earnings were not as bad as feared, S&P 500 companies’ profits fell 4.6%, the first decline since the height of the COVID- 19 pandemic. There also were far more companies issuing negative than positive prognostications. And with the S&P 500 Index still trading at roughly 17.5 times earnings, above the 10-year average, the valuations of those stocks leave them vulnerable to selling on any unsettling news.

Conclusion: With so much uncertainty for the market to deal with, including the possibility of the Fed raising rates into a period of slowing growth, we recommend investors maintain a cautious investment stance.