![]() ![]() Since headline inflation looks likely to hit a low of below 3.5% in next month’s CPI report for the simple fact that food and energy inflation peaked this time last year, and given how much of household sentiment and household inflation expectations are anchored to frequently-purchased food and energy goods, further improvements in consumer economic outlook can be expected. ![]() Indeed, broad sets of economic expectations are now improving, with the manufacturing sector’s outlook rebounding, household inflation expectations falling, and consumer confidence coming off last year’s lows. Given that a soft landing requires inflation to normalize with minimal employment sacrifices, this is good news. The ongoing resilience of the labor market in the face of rate hikes has supported economic growth and higher rates even as inflation slows, and the recent decline in firm inflation expectations has importantly not come alongside slowing hiring plans as it did throughout much of 2022. “The labor market, I think, has surprised many, if not all analysts over the last couple of years with its extraordinary resilience…it's really the engine, it seems, that is driving the economy”įed Chair Jerome Powell, June 14th FOMC Meeting Press Conference The Atlanta Fed survey of firms’ own unit-cost inflation expectations, one of the most robust ways of measuring business-side cost forecasts, shows year-ahead price growth expectations falling to 2.7% and longer-term expectations falling to 3%, both the lowest levels in two years. ![]() While it is always a good idea to have a plan for stormy weather, history tells us that the winds may be a bit more in our favor this year.Businesses, too, are steadily becoming convinced that the worst of the inflationary episode is behind us. This leads us to believe that 2023 is unlikely to be a repeat of the year just passed. The volatile market in 2022 has lowered stock valuations relative to their earnings, suggesting many of the above concerns may have already been priced in. But these challenges are offset by still-strong consumer and corporate balance sheets and the likelihood that the Federal Reserve will stop hiking interest rates in the first half of 2023, which may help give stock prices a boost. relations with China and the ongoing Russia-Ukraine conflict add risks for the economy and markets. Meanwhile, the backdrop of deteriorating U.S. Corporate profit growth is expected to be flat, and consumer spending growth should also slow. While falling, inflation remains high, and a mild U.S. We remain mindful that the coming year will not be without fundamental challenges. So while we can’t rely on history repeating itself, it does give us a reason for optimism. Those occasions occurred during the Great Depression, World War II, the 1970s, and the dot.com bubble years (early 2000s)-periods perhaps more economically dismal than what we face today. If we look at all calendar years following negative S&P 500 Index outcomes, the S&P 500 Index had back-to-back negative years in only four instances since 1930. Stocks also typically perform well when two parties share power in Washington, D.C., and November’s election ushered in a Republican majority in the House, balancing the power once again. Not only have stocks been positive in those cases, but the Index has been higher by 14.7% on average. Since 1950, there have been 18 mid-term election years, and in each instance, the S&P 500 Index has been higher in the subsequent year. This is especially the case following a mid-term election year. While each new year brings its own unique circumstances–and having a well-balanced plan helps–more often than not, bad market years are followed by good ones. And history gives us cause for optimism following a difficult year. Given the market’s continued instability during 2022 and a resulting tough period for stock and bond prices, everyone is hoping for a fresh start. The beginning of a calendar year is often the time when the previous year’s reflections transition to a new year’s hopes. We wish you a happy New Year and hope you were able to close out 2022 with friends and family. ![]()
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