Inflation slows, yields peak, the market pops, and fizzles into the holiday. – C.J. Lawrence – Market Commentary – 12/19/22

As we prepare for the holiday, the market looks like stale Champagne. There was an initial 900-point pop in the DOW on the better inflation number for November (CPI) at 7.1%. Markets were ready to pop the cork and declare inflation dead. That quickly fizzled when Fed Chair Jay Powell delivered another hawkish statement after raising rates another 0.5%. The lower interest rate increase of 0.5% (previously 0.75%) was highly anticipated, signaling a slowing rate of increases. Fed funds futures are now indicating an end to rate increases by the Spring of 2023. 

The bond market rallied on the news, with interest rates on longer-dated maturities falling. The value of the highly appreciated US-Dollar continues to fall on a lower anticipated future relative yield versus other major currencies. The Euro is up 10% versus the US-Dollar off the September low, when the Euro dipped below 1 US$, a level not seen since it was first issued 20 years ago.

As discussed in past commentaries, the US economy will likely be in a recession by the second half of 2023. However, there is some disagreement as to the severity and duration of this economic downturn.

As of this writing, 4th quarter US GDP growth is tracking at around 2.5%. The news from abroad is also improving. German business morale rose more than expected, according to the Ifo-survey in December, as the outlook for Europe’s largest economy improved despite the energy crisis and high inflation. 

In his statement last week, Fed Chair Jay Powell mentioned that a future recession might look very different from previous ones and indicated that a soft landing is possible.

The length and depth of a recession in 2023 significantly affects how we think about the various sectors. The data from the retail sector last week pointed to a clear slowdown in spending. Consumers are being cautious after excessive spending during the pandemic. This has hit the big box retailers hard. Some are shutting stores, and some are dealing with inventories that need to be liquidated. All of this is deflationary. According to our Chairman and legendary market strategist, Jim Moltz, this is part of the painful adjustment period that the economy and markets need to go through during bear markets. 

Valuations for equities and bonds are adjusting to a new set of circumstances, with much of that adjustment having already taken place by 2022.

According to technical market analysts, all major asset classes are down in bear markets territory, which is a good setup going into 2023. As of this writing, markets are up 8% in the final quarter of 2022. There will be a lot of tax selling at the end of the year as investors harvest losses to minimize taxes.

The World Cup is a good analogy for markets. It was full of surprises and upsets, but in the end, the two best teams battled for the coveted trophy. Patience and quality prevailed for the two best teams in the World.

In terms of investing, we are patient going into 2023 and sticking to quality investments across stocks and bonds, which should lead to a positive outcome.

Happy Holidays from the entire team at C.J. Lawrence.

Bernhard

Bernhard Koepp is CEO and Portfolio Manager at C.J. Lawrence. Contact him at bkoepp@cjlawrence.com or by telephone at 212-888-6342.