Investors are facing a conundrum as they try to decide how to position their portfolios for the future. On one hand, signs point to a strong economy and a booming job market. On the other, inflation remains stubbornly high and the Federal Reserve is expected to continue its efforts to bring it down.
The latest data from the US Census Bureau suggests that retail sales in January jumped 3.0%, the largest increase since March 2021, and much higher than the 2.0% increase that economists expected. This was accompanied by an increase in consumer prices of 6.4% and producer prices of 6%.
Despite the strong economic data, Wall Street firms – including Deutsche Bank, UBS, Bank of America, and Goldman Sachs – have warned that the Fed will be raising interest rates more than previously anticipated. This week, members of the Fed have also signaled that more hikes will be needed to bring inflation back to its long-term target of 2%. As the Fed continues to reduce its balance sheet by $100 billion each month, investors and advisors are left wondering at what point the central bank will stop raising interest rates in order to maintain economic growth.
While the Treasury yield curve is forecasting a reduction in interest rates before the end of 2023, the Fed has little to gain by catering to investor hopes before inflation is brought back under control. JPMorgan's Marko Kolanovic believes that markets are overpricing recent good news on inflation and are complacent of risks. Morgan Stanley Wealth Management investment chief Lisa Shalett is also warning that Fed policy is likely to pull stocks lower. DataTrek Research cofounder Nicholas Colas pointed out that the New York Fed's Recession Probabilities model shows the odds of a recession in the next year are at 57%.
It remains to be seen how the Fed will handle this delicate balancing act. Investors and advisors should keep an eye on the economic data as well as the Fed's statements in order to stay ahead of the curve.
0. “Economic forecasts are getting revised up, and people aren't thrilled about it” Yahoo Money, 19 Feb. 2023, https://money.yahoo.com/economic-forecasts-are-getting-revised-up-and-people-arent-thrilled-about-it-135118589.html
1. “Fed's failure to slow demand means no upside for stocks, analysts say” Markets Insider, 19 Feb. 2023, https://markets.businessinsider.com/news/stocks/stock-market-outlook-fed-rate-hikes-demand-cpi-retail-sales-2023-2
2. “Why stocks are up despite the risk of tighter monetary policy” TKer by Sam Ro, 17 Feb. 2023, https://www.tker.co/p/stock-market-supported-by-earnings-growth
3. “The stock market is flipped upside down as traders defy Fed, chase risk” Markets Insider, 18 Feb. 2023, https://markets.businessinsider.com/news/stocks/stock-market-trends-flipped-upside-down-investors-defy-fed-2023-2
4. “Markets Not Toeing the Fed's Line” Coronado Times Newspaper, 18 Feb. 2023, https://coronadotimes.com/news/2023/02/18/markets-not-toeing-the-feds-line/
5. “Wall Street giants say it's time to ditch stocks ahead of a recession” Business Insider, 15 Feb. 2023, https://www.businessinsider.com/wall-street-morgan-stanely-kolanovic-stocks-markets-banks-jpmorgan-investing-2023-2
6. “Wall Street luminaries say it's time to get out of the stock market before the Fed crushes the economy” Business Insider India, 15 Feb. 2023, https://www.businessinsider.in/stock-market/news/wall-street-luminaries-say-its-time-to-get-out-of-the-stock-market-before-the-fed-crushes-the-economy/articleshow/97951079.cms