Markets “In a Nutshell” for December 19, 2022
Investment Week at a Glance
Stocks finished lower for the week. The Dow Jones Industrial Average fell 1.70%, the S&P 500 was down 2.10%, and the NASDAQ fell 2.70%. Foreign stocks (MSCI EAFE) were also down, falling 0.90%. Bond prices were up for the week, with the 10-year U.S. Treasury ending the week at 3.49%. (Data source: Wall Street Journal)
Inflation Cools Down
CPI (consumer price index) came in lower than expectations at 7.1% compared to the forecast of 7.3%. This was good news for the market as inflation continues to be the main worry of investors going forward. Shelter and rent remained elevated in the CPI data but this is a lagging indicator of inflation as we see in real-time data that rents and housing prices have begun to decline throughout the country. This gives hope to investors that we could continue to see the CPI number decline as over time the decline in housing costs will work its way into the data. The increase in mortgage rates has been the main cause of the pressure put on housing prices, this is a direct effect of the Fed raising rates.
Fed Raises Rates
As expected, the Fed raised rates once again, this rate hike being 0.50% bringing the Fed Funds Target Rate to 4.25%-4.50%. We may be coming to the end of the rate hike cycle as the expected terminal rate is a little higher than 5.0%. This would mean the market is expecting another 0.50%-0.75% in rate hikes before the Fed pauses and then begins to bring down rates. The Fed will continue to need to see inflation decline if they are to pause rate hikes in the coming months. The market could rally if inflation continues to decline and the Fed pauses its rate hikes and eventually begins to bring rates lower. However, if the Fed continues to raise rates past the 5% the market has priced in, this could move the market lower as it would be a surprise to many investors. The next Fed meeting is not until the beginning of February so the market will pay close attention to inflation data leading up to that meeting.
When was the last time the Fed Funds Rate was this high? (Scroll Down for Answer)
Have a Great Week!
3) 2007. The last time the Fed Funds Rate was at this level was in 2007, before the financial crisis. The Fed lowered rates in response to the crisis to zero as it did for the Pandemic in 2020.