Last week the markets were up, largely based on Fed Chair Jerome Powell’s speech on Wednesday. The Federal Reserve Bank Governors look at a number of economic indicators to develop monetary policy. These include inflation reports, manufacturing indexes, and labor reports. Powell indicated they believe inflation is trending down, and they are planning a half-point interest rate increase in December. Many Fed observers believe we’ll see two more quarter-point increases next year before they hold rates steady.
I was in New York for a conference last week as this was playing out. The speakers were educated, highly credentialed, and clearly knowledgeable. I heard a range of expectations for the market: it had reached bottom, and it will drop another 20 to 25%. I heard that the 60/40 Portfolio, meaning 60% stocks and 40% bonds, is dead. I heard it was alive and well. Things are different this time; there is nothing new. Crypto is a speculative investment akin to a lottery ticket, and crypto is a must-have in your portfolio. Holy cow! If these are some of the brightest folks out there, how is an average person supposed to make sense of all of this?
I won’t claim to be the brightest person, but I do know a few things that make me think we are turning a corner. We could still drop a bit, but here’s why I think that 2023 should be a better year: Inflation is coming down. It’s still well above the Fed’s target of 2%, but it is decreasing. Housing makes up 40% of the Core CPI number, and that figure is calculated on six-month number. Monthly decreases in the growth of rent haven’t been fully incorporated into the calculation. And while we’re talking about housing, there is certainly contraction in that sector. We’re not talking 2008-09 levels but increasing mortgage rates have led to a decrease in price growth, and in some places, a decrease in selling prices. Housing is a lagging indicator, meaning it is one of the last sectors to change.
Corporate and personal balance sheets are still strong. Consumer spending, which drives a large portion of our economy, has not taken a big hit. Unemployment is still low and, while we are seeing some layoffs in the tech sector, there are still large number of job openings.
The big negative is the yield curve, which is the graph showing Treasury bond interest rates. An inversion, where short-term rates are higher than long-term rates, has preceded every recession since 1960; however, not every inversion is followed by a recession. The one inversion that is a bit more serious is the three month to ten year comparison, and that has only been wrong once, in 1966. That just happened, which, if we follow the averages, would indicate a recession within the next eight to 14 months.
All of these things tell me that we may have a recession in 2023 or even 2024, but it should be mild. And as stocks are a leading economic indicator, you can reasonably expect 2023 to be a positive year for the markets. There are still lots of variables, and no guarantees. Building your emergency savings and contributing to your retirement accounts are two of the best things you can do. Have a plan and stick to it, remembering that investing is a long-term proposition.
Your action item this week is to shop your cell phone provider. Many companies offer free phones or significant discounts to new customers. Take the time to review add-ons, like insurance, storage, and subscription packages, to see what you use and need and what you can cancel.
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Investment advice offered through Great Valley Advisor Group, a Registered Investment Advisor.
All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The opinions voiced in this show are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investment(s) may be appropriate for you, contact the appropriate qualified professional prior to making a decision.
 Richard C Marston, IWI NY Conference Presentation, 12/01/22