This past year has been an extremely difficult year for stocks and financial instruments in general. The Federal Reserve has been aggressively raising short-term interest rates to try to slow economic growth and contain inflation. Although the 12 month annual inflation rate remains relatively high, the last six months of monthly inflation rates when annualized are very near the Fed’s target range. Also recently, economic growth has slowed significantly as consumers have curtailed their previous aggressive spending. Surprisingly, job creation continues at a modest pace while unemployment has barely budged from its historic lows.

The largest impact of the rising interest rates has been on the stock market. But given the slowdown in consumer spending with inflation in retreat, there is now talk from the Fed that the two remaining planned rate increases will be smaller with a possible early pause. One Fed economist is speculating that with the strength in the labor market there is some hope of achieving the proverbial “soft-landing” which is defined as the containment of inflation without a recession. Even though it’s never been achieved before, it is not unrealistic this time around, because the one other ingredient that also has never been tried before is the massive covid stimulus payments directly to consumers that boosted aggregate demand and which even now continues to circulate in the economy.

As always, the stock market is looking ahead. It is the most accurate predictive component of the Index of Leading Economic Indicators. It appears that the present buoyancy in the market indicates that it has begun to anticipate the end of rising interest rates, or that at least the remaining modest increases will be inconsequential. If true, the economy may avoid recession, employment will remain strong, and that inflation will be contained. We anticipate that the past two years of structural economic realignments, (distribution channels etc.) together with the aforementioned covid monetary stimulus will set the stage for a promising recovery. The next interest rate hike at the February 1 Fed meeting is now rumored to be a .25% hike and a pause in further rate hikes is possible. It would also be strong confirmation that Fed economists also believe a soft landing is possibly underway. The market’s behavior in coming weeks could also lend further credibility to an increasing probability of that elusive outcome. Additionally, future interest rate reductions can provide a substantial boost to containing inflation by reducing housing rental and ownership costs. Housing costs are one of the largest components of the inflation index. Higher and rising interest rates and housing costs, despite lower prices, have been a real impediment in the inflation fight thus far.

As always, we remain cautious and vigilant. Please remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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