Inflation Cooling, Economy & Earnings Next
Finally, some positive news for investors…
Inflation is Cooling.
The Federal Reserve’s policy is starting to have the intended impact of slowing the economy and moderating inflation. There’s no quick fix for inflation so the path ahead will likely take time, but for now, the Consumer Price Index (CPI) cooled again in November, with the headline number falling for a fifth straight month to +7.1% YoY, down from the recent high of +9.1% YoY in June.
Knocking inflation down to the Fed’s mandated goal of 2% will be a process, likely with some mixed and choppy data points in the future, but the trend should be lower over the coming 12-18 months. Remember, Fed policy (via interest rate hikes + balance sheet reduction) takes time to work its way through the economy (lag) and are blunt tools themselves, meaning the consequences on the economy are uncertain and the outcomes are varied.
Worst of inflation is likely past, but Worst for economy is likely just starting.
The economy may not be out of the woods – unemployment to rise, housing market to show further weakness, corporate earnings to soften in 2023 – and yet it’s also important to acknowledge that the stock market often leads the economy by roughly 6 to 12 months.
We have continued to say that the markets will be hostage to high inflation, but with a softening trend in the price data being confirmed this morning, this is the first time we are turning incrementally more positive for investors in the last 12 to 18 months. We are entering a seasonally strong time for the markets coupled with the historical trend of moving higher post midterm elections – perhaps setting up markets for a much-welcomed holiday rally.
Read: The Cure for High Inflation May Soon Present a Buying Opportunity
We have moved past the historically weak August-September period into the strongest performing months of the year.
In fact, the November to April six month period during a midterm year has been higher 18 of the last 18 times, which is another feather in the cap of the bulls.
It’s also worth noting that cash in Money Markets at our custodians are earning between 3.3% to 3.7% APY and will continue to increase as the Federal Reserve raises rates. The market is expecting the Federal Open Markets Committee (FOMC) to increase interest rates another 0.50% tomorrow to take the key bank lending rate (Fed Funds Rate) up to 4.25% - 4.50%.
Sandbox Client Custodial Money Market Rates
- Fidelity Government Cash Reserves (FDRXX) = 3.42% APY
- Schwab Value Advantage Money Fund (SWVVX) = 3.79% APY
*Calculated on 7-Day SEC Yield as of 12-12-2022. Click Links to view most recent yield.
As such, for the first time in many years, TINA (there-is-no-alternative) has been replaced by TARA (there-are-reasonable-alternatives) for stocks. It may be hard to find a silver lining in 2022’s markets, but the advancement in yields and reset in market valuations is offering attractive opportunities outside just the stock market.
Read: Get Paid Interest Rates of 2% to 13%
We expect more volatility ahead given the difficulties confronting the market, however we feel the market should weather the storm, as it has in the past. The consumer remains on relatively strong footing, corporate earnings in the most recent quarter were better than feared, and the credit/liquidity markets are not showing imminent distress.
We continue to watch markets closely and will communicate our thoughts in real-time. We are happy to address any specific concerns or questions you may have so please reach out to your Sandbox financial advisor to speak at greater length.
Happy Holiday’s from your Sandbox Team!