Markets “In a Nutshell” for January 16, 2023
Investment Week at a Glance
Stocks finished higher for the week. The Dow Jones Industrial Average rose 2.00%, the S&P 500 was up 2.70%, and the NASDAQ rose 4.80%. Foreign stocks (MSCI EAFE) were also up, rising 3.30%. Bond prices were up for the week, with the 10-year U.S. Treasury ending the week at 3.50%. (Data source: Wall Street Journal)
Inflation Continues to Slow
The market once again got good news on the inflation front as December’s numbers came in line with expectations. CPI fell to a 6.5% increase year over year and while this is much higher than we have seen prior to the last 12 months, we continue to see inflation move close to the 2% target. Looking at the report in more depth, the reasons we are seeing inflation come down are consumer demand is weakening, shipping costs are falling, and supply shortages continue to go away for producers. The big question going forward for investors is if the economy will be able to absorb these higher rates that have caused consumer demand to drop without going into too deep of a recession. Some believe the Fed should stop raising rates as they have done enough to slow inflation, but many still expect the Fed to raise rates in their next meeting in two weeks.
Strong Start to 2023
After a rough 2022 for stocks and bonds, the start of 2023 has been very nice to investors. In just two weeks the S&P 500 is already up over 4% while the NASDAQ is up nearly 6%. Bonds have also performed well up around 3% as yields have fallen to start the year. With the 10-year treasury falling 0.4% to start the year, this has given a boost to stocks and bonds as when yields fall stocks and bonds tend to perform well. Last year we saw a spike in yields which was the main reason for the down year for both stocks and bonds. As we move into 2023 many investors don’t see yields moving much higher as they hope to see a pause in rate hikes from the Fed early on in 2023. If we begin to see inflation tick back up, this would change the whole landscape for the market and Fed for the year as rates may spike again.
When was the last time the Fed cut rates after a tightening cycle? (Scroll Down for Answer)
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2) 2019. The last tightening cycle we saw was in 2018 and the Fed cut rates in 2019. In-between the 7 months of the last hike and first cut, the S&P 500 rose 18% while bonds returned 7%. This could be good news to investors as we could see a stop in hikes and possibly a rate cut late 2023 early 2024.