We have a busy economic calendar these next two weeks – both data releases, testimony and an FOMC decision.
Let’s begin with a review of the first two months of this year. January and the early part of February began on solid footing. Growth stocks that were shunned in a major way in 2022 were back in vogue. The Federal Reserve Open Market Committee (FOMC) raised its Fed Funds target rate by 1/45 (25 bps) to a range of 4.50-4.75% in early February, after a 50bps raise in December and a series of four 75bps hikes last year. The FOMC was prepared to take its tightening program at a more moderate pace.
Ultimately, the January PPI (Producer Price Index) which was released on February 16, came in higher than expected, sending fears of higher consumer prices in the future. The implication was that the FOMC needs to raise interest rates more aggressively at its next meeting. This begs the question: should the FOMC raise rates again by 25bps at its March 21-22 meeting or backtrack and raise by 50bps? The latter would send shock waves through the financial markets. Clearly, the FOMC has painted itself into a corner.
Please note that the Standard & Poor’s (500) Index rose all year to a peak of 4,147.60 on February 15 and then got knocked down by the PPI release on February 16. The decline from February 15 to March 1 for the SPX was 4.73%. OF course, it was even greater for the higher beta growth indexes. One can argue that the decline was technical in nature while other points of view merely believe that after rising 8.02% in 2023 through February 15, the SPX was just looking for a reason to correct and the PPI gave us just that motivation. As an aside, in general, the 4th quarter 2022 earnings season which lasted from mid-January through the end of February was for the most part positive and better than expected.
For the record, the SPX rose 6.18% in January and declined 2.61% in February. In general, a positive return in January portends a positive rest of the year. Also, February can be, as it was, a tricky month for the stock market. The rise in January is most welcome after last January’s drubbing.
What is really tugging at the pants legs (or dress hems) of economists is whether the FOMC target of 2% inflation is no longer applicable for economic management. A new school of thought is that we should accept a higher rate of 3%. The reason being that due to excessive government spending and poor energy management, 2% inflation expectations are unreasonable. I am beginning to migrate to the 3% School of Thought. If the FOMC adopts a 3% target, or even if any of the talking Fed heads broach the subject, the markets will interpret this as the need for a more sanguine interest rate policy.
Today, Chairman Powell will testify before the Senate and repeat that testimony to the House on Wednesday, which we commonly refer to as the Humphrey-Hawkins testimony. What usually occurs is the FOMC Chair will spew economic theory while the Congressional leaders (of both parties) spew political diatribe.
Later in the week, we will receive the February Employment report, including potential adjustments to data for December 2022 and January 2023. Please understand that the unemployment rate is really no longer as relevant as it used to be as many people have removed themselves from the job market. Also, the headline unemployment rate is what we refer to as U-3 unemployment while the more economically relevant rate is U-6 unemployment. The former measures the number of people who are jobless but actively seeking employment whereas the latter accounts for anyone who has been seeking employment within the previous twelve months but has been unable to secure a job and has not searched for work in the past four weeks. U-6 includes what we refer to as “discouraged” workers. Whereas U-3 is used by the financial media, U-6 is favored by economists.
The great debate remains if we are about to enter a recession or if we will avoid one in the United States. I remain steadfast in my opinion that there has and will be rolling recessions in certain states and industries but not a full-blown coast-to-coast recession.
From an investment perspective, we are seeing the market shying away, but not totally shunning Dividend and Energy stocks and favoring Growth and Consumer Discretionary stocks. It may be time to move assets from the former group to the latter group. Some software and semiconductor stocks have done well for us which typically is a “risk on” signal. Time will tell.
All the rage is now on the topic of Artificial Intelligence, especially after Microsoft’s (MSFT) $10 billion investment in Chat GPT. Having exposure to Microsoft and to a lesser degree Google, will give us exposure to this technology.
That’s all for now.