The Fed isn’t satisfied and markets aren’t listening

SUMMARY

The recent rally in financial markets will only compel the US Federal Reserve to step up its rhetoric and make it more likely to hold peak rates.


  • Though the Fed’s next rate hikes are likely to be “only” 25 basis points, the cumulative power of its medicine is still pumping through the economy.
  • Policymakers are insufficiently patient with the present decline in inflation. In spite of many data points showing inflation abating, the Fed’s focus on a “2%” rate of inflation is narrowing their field of vision. More fiscal restraint in combination with an already slowing economy makes talk of a “soft landing” look farfetched.
  • While we don’t expect US employment data to fall until later in the first quarter 2023, we see the recent ISM, retail and housing data sufficient to presage a recession that can, for a time, further depress asset prices and weaken credit markets.
  • The problem with most future earnings estimates is that they imply 2022’s fourth quarter marked the low for profits. This can contribute to a false sense that the economy is out of the woods and it’s “all clear” for markets.
  • Indeed, if a recession in corporate profits was already over, we would be far more optimistic about the near-term outlook for equities. Instead, we think analysts will need to cut estimates again later in the year even with “beats” during the quarter just past.
  • A recession is on its way. We see signs of it appearing with greater clarity month over month. Thus, we can expect more near term market volatility in the US as well as market corrections to return before anticipating a lasting recovery. We stand ready to position portfolios more positively when we see greater resolution of these contradictory Fed and investor views.

OUTLOOK

Mid-Year Wealth Outlook 2023

While our asset allocation strategy remains defensive, investors should consider staying invested and modify portfolios over time.

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