January Market Commentary: The Fed Goes Meta

December Recap and January Outlook?

While the equity markets, as measured by the S&P 500 index, were up in the third quarter, December was a disappointment from the gains seen in October and November. There’s no understating of the volatility seen in the market this year. For context, Dow Jones Market Data indicates that the S&P saw more market moves of 2% (both up and down) in 2022 than in 2020. The 46 moves over the 2% threshold are approximately four times the 10-year average of 11.3.

Inflation is dropping, if slowly. Employment is lower but strong, which supports the economy, and GDP returned to positive. What’s causing the volatility? Many factors are in play, but arguably the largest is the Federal Reserve’s moves on interest rates and the messaging from Chairman Powell and the Fed Governors.

Let's get into the data:

• 12-month CPI was 7.1% in November. The Bureau of Labor Statistics reported number was lower than expectations
• The December non-farm payroll number was 223,000. The report from the Department of Labor was a decrease from the November number and slightly above expectations
• The unemployment number edged back down to 3.5%. This statistically matched the lowest number since 1969
• Three-month wage growth averaged 4.1%. The number includes revisions to prior months. This compares favorably to the 5.8% growth seen before revisions and seems to indicate a more normal rate.

What Does All of That Data Add Up To?

While an overstatement, it does seem at times that the only data the market is interested in are the number of hundredths of a percentage point that make up the increase in the Fed Funds rate – and when that will go to zero or turn into a decrease.

No one seems more aware of this than the Fed. Back in the day, before 2008, pronouncements from the Federal Reserve were crafted to be obscure so as to avoid moving markets. This changed over time with successive Fed Chairmen to a more direct approach. The current Chairman, Jerome Powell, has evolved still further. First, we had the “Fed ratchet” of earlier this year, in which Powell telegraphed moves that the market could adjust to gradually.

This may have worked too well. While asset values have declined, the market remains poised to bounce up at every hint that the Fed may slow or stop rate increases. This may be masking or even delaying the impact of rate increases in slowing the economy and bringing inflation down.

With the economy seeing a lagging impact from rate increases already enacted, this complicates the Fed’s ability to accurately read the economic tea leaves and know when to stop to avoid a recession.

Powell has resorted to using the Fed’s pronouncements to assert that bringing down inflation is the highest priority and that any thought that the Fed will ease off before the job is done is a “misperception.” This could be read as an attempt to influence the market and keep asset values lower.

Whether the resolve is solid remains to be seen. While Powell is clear on getting inflation down, the Fed is still positioning a “soft landing” in which the economy avoids recession as a possibility. That would require some easing of rates.

Chart of the Month: Fed Funds Rate, the early 1980s

The chart below tracks the path of the Fed Funds rate between July 1979 and November 1981. This whipsaw is precisely what the Fed is trying to avoid. A recession in early 1980 (indicated by the shaded area on the chart) resulted in a massive decrease in the Fed Funds rate – which was followed by an increase and another, more prolonged recession.

Equity Markets in December

• The S&P 500 was down 5.90% and finished the year at -19.44%
• The Dow Jones Industrial Average lost 4.17% and had a year-end result of -8.78%
• The S&P Mid-Cap 400 returned -5.72%, and full-year performance was -14.48%
• The S&P Small-Cap 600 decreased 6.89% and was down 17.42% for the full year

Source: S&P. All performance as of December 30, 2022

December reversed the positive performance of October and November, and despite a small “Santa Claus” rally, all 11 sectors declined. Utilities saw the smallest decline of 0.77%, and Consumer Discretionary saw a whopping 11.31% ?decrease for the month. In 2022, Energy was the only positive sector for all of 2022, up 59.04%, and Communication Services was the worst sector, down 40.42%.

Bond Markets

The 10-year U.S. Treasury ended the month at a yield of 3.88%, an increase from 3.61% in November. For comparison, the 10-year yield was 1.51% at year-end 2021. The 30-year U.S. Treasury ended December at 3.97%, up from 3.75% last month. The Bloomberg U.S. Aggregate Bond Index ended December with a return of -0.45%. The year-to-date return at month end was -13.01%, continuing the trend of positive correlation between the equity and bond markets.

The Smart Investor

The ongoing strength of the labor market is providing some hope that if 2023 does see a recession, it will be mild. However, predictions are that growth will slow from its already low levels. The path of the markets may be as choppy as 2022, with observers and investors still playing “watch the Fed” and the Fed attempting to fight inflation while managing expectations in a way that will be helpful to Fed policy and not fight it.

What should investors focus on? The same thing as every year: your own goals. There’s no substitute for having a plan, no matter what stage you are in. The SECURE 2.0 act has made meaningful improvements to the ability of just about everyone to save for retirement or conserve retirement savings. Updating your plan to take advantage of the new opportunities makes sense.

There are some tactical things you may want to think about:

• 401(k) limits increased. Think through when you’ll contribute. If you normally use a bonus for this, you may want to consider a different approach
• If your income is low due to starting a practice, or purchasing equipment for your practice, consider taking advantage of lower account values through a Roth conversion
• Student loan repayment strategies are getting a facelift. Investing in tax-deferred accounts can lower your student loan payments while enrolled in an income-driven repayment plan.
• Ongoing volatility means diversification is even more important

The start of the year is all about resolutions. But there’s a reason that the second Friday of January is known as “Quitter’s Day.”?When it comes to your financial plan, having resources build and monitor an ongoing structure that runs in the background and help you achieve your goals.

?Author: Cecil Staton, CFP? CSLP?

I'm a fee-only financial planner dentists & physicians with student loans give a purpose to their paycheck.

I left the large financial institutions to start my own RIA. I did it so people could pay for real planning and not just an agenda to sell a hidden product. As a fiduciary, Arch Financial Planning, LLC was built on that promise by delivering non-cookie-cutter plans that provide solutions to achieve their goals.

Who do I serve?

Age:?Dentists & Physicians between 28-45 years old

Goals:?Pay off student debt, start a practice, and grow their wealth

Target:?High-earning doctors with student loans and practice owners

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The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

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This website (the “Blog”) is published and provided for informational and entertainment purposes only. The information in the Blog constitutes the Content Creator’s own opinions and it should not be regarded as a description of services provided by Arch Financial Planning, LLC or Cecil Staton, CFP? CSLP?.?The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about personal financial planning. The views reflected in the commentary are subject to change at any time without notice.?Nothing on this Blog constitutes investment advice, performance data, or any recommendation that any security, portfolio of securities, investment product, transaction, or investment strategy is suitable for any specific person. From reading this Blog we cannot assess anything about your personal circumstances, your finances, or your goals and objectives, all of which are unique to you, so any opinions or information contained on this Blog are just that – an opinion or information. You should not use this Blog to make financial decisions and we highly recommend that you seek professional advice from someone who is authorized to provide investment advice.