As the calendar turns over to start a new year, 2023 is already off to a positive start. Although a brief sample size, the Dow Jones, Nasdaq, and S &P 500 are all in the green so far. The positive start to the year has been aided by signs of slowing wage growth in December, but more important were the numbers that were reported this week. The U.S. cost of living fell 0.1% in December which marks the first decline since the onset of the pandemic in 2020, weighing heavily on showing a further slowdown in inflation after a peak rate was reached last summer. Furthermore, the annual rate of inflation fell for the sixth month in a row to 6.5% from 7.%, marking the lowest level the rate has reached in more than a year.
Markets are typically forward-looking, but last year U.S. stocks displayed a strong response to CPI data, especially when the data would miss the economists’ expectations either in the positive or negative direction. Getting caught up in chasing these up-and-down days is short-term thinking and market timing – a very difficult strategy to execute on a consistent basis. This also contradicts long-term investing strategy, i.e. remaining in a portfolio that is allocated appropriately and adjusted as we see fit. It is important to remember that returns are often concentrated in very short time frames. Therefore, it is critical to capture on the up days, but also to have the proper mix of fixed income and other positions to play defense on the down days.
Looking at the Big Picture
We are still focused on the actions of the Federal Reserve as the year progresses. As a refresher, why does the Fed raise rates? Because higher interest rates bring inflation down by reducing demand and slowing the economy. Inflation is coming down, but not fast enough to calm the Fed’s outlook. In addition to inflation coming down, they also want to see price pressure ease a significant amount as well, wage growth in particular. However, the Fed is prepared to slow the pace of interest-rate hikes, and some economists are predicting a halt in rates altogether later this year. By doing so, this would allow the Fed to gauge the effects of the monetary medicine they’ve been putting into the economy.