Fact or Fiction? Addressing Popular Market Proclamations

DEWITT, Mich. - Feb. 3, 2023 - PRLog -- Key Takeaways:

• 2023's stock market rally rolled on last week, helped by a downshift in Fed rate hikes, with the S&P 500 now up nearly 8% on the year. Interest rates took a bit of a round trip, falling through the week on expectations for less restrictive Fed policy but rising on Friday following a strong jobs report¹.
• The January employment report released on Friday showed that the economy added a whopping 517,000 jobs last month, more than double the consensus forecast. While other parts of the economy are showing signs of slowing, the healthy labor market should offer support for consumer spending, helping moderate a potential downturn.

After a year (2022) in which nothing seemed to go investors' way, 2023 has, so far, been the polar opposite. Stocks are up handsomely while interest rates are down. Last week brought a heavy dose of fresh information on what we'd consider to be the two critical drivers for the market this year: the Fed and the labor market. The outcome was another up week for the market – its fourth in the first five weeks of 2023.

While this recent rally is both welcome and reasonable, we don't think it should be viewed as confirmation that the coast is clear.  Given what we learned last week, here are our latest thoughts on several popular takes that prevailed heading into this year:

The Fed is overdoing it with rate hikes.

• Fact and Fiction. The distinction lies in the context of necessity and broader outcome.  In our view, it's been necessary for the Fed to take aggressive action to combat high inflation.  Has it tightened (raised rates) to a point that threatens to undermine economic growth? We think so. Monetary policy acts with a lag, so we have yet to see the full impact of the Fed's actions. So should the Fed have stopped earlier to prevent a slowdown?  No. While we certainly would prefer monetary conditions that are accommodative to robust GDP growth, underdoing it runs the risk of reigniting inflation that would pose greater structural threats to the economy.
• Stocks rallied last week following the Fed's latest meeting in which it announced a 25-basis-point (0.25%) rate hike. Markets found comfort in a few elements of the announcement:
• This marked a downshift in the pace of rate hikes, with the previous six hikes being 0.5% or larger¹.  
• The Fed acknowledged that disinflationary forces are taking shape, suggesting it feels it's making progress¹.
• The Fed did not make special or dramatic efforts to push back against the recent evidence of easing financial conditions (which include measures such as access to, and cost of, credit)¹.

Source:  1. Bloomberg