Key Events: The Fed throws cold water on ‘the pivot’
The market digested higher than expected inflation consumer spending data. Accordingly, Federal Reserve bank Presidents spoke publicly this week, delivering a cohesive message that despite slowing inflation, there are more interest rate hikes to come. [1]
Most companies have reported 4Q earnings reports and, as expected, profits continue to decline. [2]
Market Review: The pause that refreshes?
Large cap stocks reacted to the hawkish Fed as the S&P 500 declined slightly for the week. Emerging markets were down slightly as well, but small cap and developed international stocks held onto gains. Bonds declined as interest rates increased across the board, reflecting hawkish Fed rhetoric.
Outlook:Unsettled
Volatility may continue until we gain clarity regarding the path of the economy and markets; discipline is key.
The evidence for a slowdown includes slowing earnings and contracting manufacturing surveys. Inflation readings above the Fed’s comfort level bode for continued rate increases. Investor bearishness, a contrarian indicator, is lower than any point during 2022,[3]
The market, however, is currently looking past the expected economic weakness. The chart below highlights the IMF World Economic Outlook; notably the IMF has increased their 2023 growth outlook from October’s 2.7% estimate to 2.9% at the end of January. While the risk of a market decline has increased, technicals and market breadth are positive. Additionally, strong January returns often carry through to the rest of the year, and the presidential cycle bodes for strong returns as well.
[1] Source: Federal Reserve
[2] Source: Factset
[3] Source: AAII Investor Sentiment Survey
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