February 2023 Market, Economic & Investing Insights
Hello everyone,
I come to you each month to provide context for what’s happening in the financial markets, in the economy, and in the investment world. I suppose the best theme to run with for this month is that the market is still trying to find its feet. In 2022, we had failed rallies in June – August and in October both over the same theme – what the Fed is or isn’t going to do. Back in June, pegged to inflation at 9% year over year. Market jumpiness continues to be over the same topic – what the Fed is going to do. Experts believe the Fed will not stop until it sees 2% inflation despite those that feel otherwise. Today, we had a quarter point increase in rates, what many expected the Fed to do.
January optimism is likely founded in stronger fundamentals to pricing, and a general improvement of conditions over 2022 but still with a continued rolling recession by sector. Chief Investment Strategist for Charles Schwab, Liz Ann Sonders, states that we have likely seen the worst of the bear market with overall healthier signs but to plan on continued volatility, and to remember analyst comments aren’t including Black Swan events or what I am beginning to see as “Frequent Swan” unpredictable events. In short, Sonders believes some of the rallies have been the market getting ahead of itself given what it thinks the Fed will do. Some are pricing in rate cuts at the close of 2023 and Sonders feels that is some time off, that the Fed will take a long pause on rates once it hits a target rate of 2% inflation – look to 2024 for that potentially.
On that note, it is important to know that inflation is a year over year rate and inflation is becoming entrenched as I have written about previously. A good example of this is to look at eggs, what was $2 is now $8 or more, perhaps the cost goes down to $6 but we started at $2. Prices are becoming fixed at higher price levels no matter what even if inflation comes down. The point is this is all relative. Will wages now increase given the higher costs of everything? Sonders believes there will be increasing heat on the labor market to control costs, hitting the service industry harder than it has presently.
The fact is that what was formerly cheap – goods, energy, and labor (GEL) – no longer is and this is a marked secular change. Regarding the debt ceiling, I think we can expect volatility as we approach the crucial hours on the issue, but analysts believe politicians on both sides will do what they do best – kick the can down the road. However, with corporate and consumer balance sheets looking relatively healthy, the one that isn’t is the government which will become a hotter issue this year and into coming years. Consider that over the last three years, the government comprised 39% of US GDP and 9% of debt. It is interesting to note that according to the 2022 Index of Economic Freedom, the US is 25th on the list globally, not even in the top 5. I find it hard to argue that with government figures only increasing that the US can claim it leads economic freedoms globally, the fact is by the numbers, it doesn’t.
Everything has a cost. As Sonders stated, the US is still reeling from Covid economic and market impacts even if the health threat has been substantially tamed. The US has also experienced the most aggressive Fed tightening in 40 years. This all leads to a conclusion that we aren’t out of the woods completely yet, and there is a contradiction in what the market and Fed are saying. I maintain that we have yet to solve the energy issue which is a constant input to all systems.
Regarding investment strategies, Sonders reiterated that those with a financial plan and guidance are faring much better than those off on their own winging it in volatile times. She continues to state and as I have stated a number of times, active management is outperforming passive, and this might be a permanent change.
Where do we go from here with investments? It is a continuation of a theme I’ve stated before – active over passive, tactical maneuvering of investments, looking for opportunities in managed futures, blue chip dividend stocks, fixed income, and considering the amount of money market investments to have as a nest egg conservatively on the side. Please note that even if we look at money market rates and savings, those are still a net negative against our current inflation which is of course driving many to assume a higher risk profile than is normally comfortable.
If you have any questions or would like to review investment strategies, please don’t hesitate to reach out.
I wish you all the very best!
Lisa Durant, President
