I’d like to remind everyone that the predictions for the stock and bond markets for 2022 were totally off-base and missed by a mile. On 12/31/ 2021, the markets were flying high. Even though inflation was rising, the Federal Reserve said it would be “transitory.” The Covid omicron variant was reaching a high peak but that didn’t seem to affect the market much since the economy was open.
The “everything bubble” was making investors happy. Stocks, bonds, real estate, crypto currency and other investments were all making highs.
We are now in 2023. All METARs know that the “everything bubble” popped in 2022 since the Federal Reserve belatedly raised the fed funds rate rapidly to combat sticky inflation and Russia invaded Ukraine.
Professional investors have made many predictions about the outlook for 2023.
" To kickstart the new year, Bloomberg News has gathered more than 500 calls from Wall Street’s army of strategists to paint the investing landscape ahead. And upbeat forecasts are hard to find, threatening fresh pain for investors who’ve just endured the great crash of 2022.
As the Federal Reserve ramps up its most aggressive tightening campaign in decades, the consensus view is that a recession, albeit mild, will hit both sides of the Atlantic with a high bar for any dovish policy pivot, even if inflation has peaked."
Fed Chair Jerome Powell’s last major speech was on 11/30/2022. I like to watch him speak. He’s straight-spoken and clear.
January 4, 2023, Reuters
All officials at the Federal Reserve’s Dec. 13-14 policy meeting agreed the U.S. central bank should slow the pace of its aggressive interest rate increases, allowing them to continue increasing the cost of credit to control inflation but in a gradual way meant to limit the risks to economic growth…
“Participants reaffirmed their strong commitment to returning inflation to the (Federal Open Market) Committee’s 2% objective,” the minutes said. "A number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the Committee’s resolve to achieve its price stability goal…“No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023…”… [end quote]
But the markets don’t believe that the Fed will hang tough. The temper of the market is still bubbly. There’s no sign of true capitulation or revulsion.
The Fed’s rate raises have reduced inflation. Month-to-month inflation has dropped even though year-over-year inflation is still high. Goods price inflation has dropped. The Fed is watching inflation in services, largely wage increases.
Unemployment is at a record low of 3.5%. According to the Fed’s economic models, this is below the neutral rate of unemployment and thus inflationary. Unemployment Level/Job Openings: Total Nonfarm is the lowest on record, showing about 2 job openings for every unemployed person. “Unemployed” people have actively sought work in the past month. People who are not actively seeking work are counted as “out of the labor force participation” rather than “unemployed.”
The November JOLTS report (released last week) showed little change.
The December 2022 Jobs Report
Total nonfarm payroll employment increased by 223,000 in December, and the unemployment rate edged down to 3.5 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in leisure and hospitality, health care, construction, and social assistance. [end quote]
Mike Shedlock analyzed the employment report carefully. The BLS news release presents statistics from two monthly surveys. The household survey
measures labor force status, including unemployment, by contacting workers at home and asking them about their work situation. The establishment survey contacts employers and asks them about their workers. If everyone has a full-time job the numbers of workers should be the same from both surveys. But they are actually widely different.
Mish’s conclusion: Full time employment is down 288,000 since March and down by 444,000 since May. People are taking on second part time jobs to make ends meet. But overall employment (the total number of people working) is stagnant.
The Labor Force Participation Rate, age 25-54 Yrs, is growing and is now 82.5%, close to the pre-pandemic level. The Labor Force Participation Rate, age 55 Yrs. & over fell after the pandemic and is stagnant, now 38.8%.
The economy is beginning to contract. This was the objective of the Federal Reserve’s campaign to raise interest rates and not a surprise.
Economic activity in the manufacturing sector contracted in December for the second consecutive month following a 29-month period of growth, say the nation’s supply executives in the latest Manufacturing ISM® Report On Business®. The December Manufacturing PMI® registered 48.4 percent, 0.6 percentage point lower than the 49 percent recorded in November. Regarding the overall economy, this figure indicates contraction after 30 straight months of expansion.
Economic activity in the services sector contracted in December after 30 consecutive months of growth — with the Services PMI® registering 49.6 percent — say the nation’s purchasing and supply executives in the latest Services ISM® Report On Business ®. In December, the Services PMI® registered 49.6 percent, 6.9 percentage points lower than November’s reading of 56.5 percent. [end quote]
The Control Panel is neutral. There aren’t any clear signals. Stocks are up and down. Bonds are up and down. This is noise.
The USD has stabilized at a lower level than before. Gold is still rising but oil, silver and copper have stabilized. Natgas is falling.
The Price-to- earnings ratio of the S&P 500 based on average inflation-adjusted earnings from the previous 10 years, known as the Cyclically Adjusted P/E Ratio (CAPE Ratio) has shown some air let out of the bubble but is still twice the historic median.
The S&P/Case-Shiller U.S. National Home Price Index has shown a slight drop but is still in bubble territory.
At 3.7%, the real yield of the 10 year Treasury is still negative based on today’s inflation rates but the market expects inflation to drop to 2.2% over the 10 year time frame.
The METAR for next week is cloudy. I expect the NASDAQ to fall due to rising interest rates but the SPX may hold its own or even rise a little. Note the pattern of lower highs and lower lows – if the SPX rises next week that pattern may be broken. But beware – the Fed is still raising rates. Picture what the market will do with a Fed funds rate of 5%.