By: Herbert Diamant
As we head into 2023, I wanted to share some topics that will impact investing in the markets. Given their collective impact, it is helpful to outline the significant issues we all face.
First, the Federal Reserve and Wall Street are talking past each other. Fed Chairman Powell hinted at a smaller rate increase than the prior month. Wall Street concluded rates were heading lower. Yet, with elevated inflation, the Fed stated rates would run higher for a longer duration of time than expected. It is unreasonable to expect a quick return to the monetary easing policies that created the pandemic recovery.
Recent inflation numbers suggest that price growth has peaked, but this does not lead to sharply lower inflation. Instead, economists are concerned that the real risk is that inflation stays at a level much higher than the 2% rate the Fed wants. What this means is the prices of many staples in our supermarket baskets not only remain higher than a year ago, but their prices continue to rise as the manufacturers pass along the production price increases.
Continued higher interest rates will push our economy into a recession, which is why the stock market trading is so choppy and the yield curve is inverted. The Fed must get inflation under control, for if they stop now, we will see stagflation. This is the combination of a recession and high inflation that we last experienced in the Carter years.
What complicates the job of reducing inflation is that the federal government has spent trillions of dollars to inflate the economy. Within a few months, both the Trump and Biden administrations collectively spent $1.9 trillion on “covid relief”. The recent Infrastructure Act will compete with the private sector for resources like labor, construction materials, and equipment. This will create inflation by raising construction costs across the United States. The “Inflation Reduction Act” is a climate change spending agenda that is widely acknowledged to have nothing to do with reducing inflation. Such bursts of fiscal spending to prime the economy are creating inflation, which makes the Fed’s job of reducing inflation substantially more difficult.
Another economic impact is the ongoing labor shortage. Across every industry, from landscapers to construction to retail, it is difficult to hire competent workers. We can no longer blame the shortage of workers on the pandemic’s early retirees. Is this education related, or is it part of our immigration issues? The big question is, where are the workers?
Then there is China, whose policies continue to disrupt our supply chain. Easing restrictions may work, but factories will shut down as Covid starts to infect unprotected workers at a high level. It is absurd to have businesses continue to combine low inventories for just-in-time manufacturing along with geographic reliance on an adversary.
As always, investing is not about winning within a particular day or month, but rather about making smart three to five year commitments. No investor should ever get invested to attempt to catch a quick rally. It is okay to miss a market bottom as we wait for affirmation that the economic recession is minor in nature. Following your long-term financial goals, which may include the preservation of capital and long-term growth, is the key to getting through this economic cycle.
If you have any questions about portfolio advice and management, give us a call or email us at info@portfolioadvisor.com.