Market Monitor: Into the Home Stretch

We're on the home stretch of a year in which "unprecedented" doesn't even begin to capture the sentiment. Nothing went according to plan, for anyone, from Russia's invasion of Ukraine to the Fed's domestic attempts to combat inflation. Along the way, we saw spiking gas prices, tanking equity and bond markets, a continued red-hot labor market, a head-scratcher of a mid-term election, and a broad and deep meltdown of crypto. 

While stubborn resistance has succeeded beyond all hopes for the Ukrainians, intransigent inflation has resulted in a series of interest rate increases that we will only know the impact of sometime in 2023. Any one event had implications for everything else, and the intertwinement was perhaps exemplified by a year in which equities and bonds were primarily locked in a Texas two-step. 

The one thing we seem to have been able to count on over the last year is volatility and uncertainty. 

Let's get into the data:

•  The November non-farm payroll number was 263,000. Despite the efforts of the Fed to slow down the economy, the unemployment rate remains stubbornly low, at 3.7%. This was significantly more jobs added than the 200,000 expected.  
• 12-month CPI was 7.1% in November. Inflation is still too hot, but it is trending in the right direction.   This marks the fifth straight month of cooling CPI.  
• The second estimate of third-quarter GDP came in at 2.9%. The Bureau of Economic Analysis reported that the higher number reflected upward revisions to consumer spending. 
• Speaking of Spending, a record 196.7 million Americans shopped during the Thanksgiving retail period, according to the National Retail Federation. This is up by 17 million over 2021.

What Does All of That Data Add Up To? 

In short, the Fed still has work to do. Inflation has been declining, but it's still far too high for anyone's liking. A still-hot labor market, a positive GDP, and a spending consumer mean that the economy (or at least parts of the economy) is proving somewhat resilient to the Fed's rate hikes.  

While that's good news right now, the problem is that at some point, the 375 basis point increase in the key short-term rate enacted so far this year – plus a likely 50 basis point increase still to come in December – will begin to take effect. Powell continues to caution that rate increases have a lagging economic impact. This makes it extremely difficult to gauge how high rates should go and how fast they should get there. 

Powell's recent guidance on rate increases is that overall rates may need to go higher than originally thought but that the amount of the monthly increase may go down. It will be hard for the Fed to engineer a soft landing, avoiding a recession. Even if we go into recession, the economy's underlying strength may mean that a recession would be shallow and short. 

Markets

 For the year, through 12/13/22:

• The S&P 500 is down 14.35%
• International Index (MSCI EAFE) is down 11.63%
• Bonds are down 11.23%

Source: Kwanti

 

The Smart Investor

While you might want to shut it down and go into holiday mode, there are still a few personal finance items you should consider for 2022: 

•  Max out 401k, HSA, and other tax-efficient savings
• Complete charitable giving before year-end
• Don't forget your RMD, or complete a qualified charitable distribution to offset it
• It's not too late for tax-loss harvesting

 For 2023, the best approach is to start the year off ahead of the game:

•  Set budgets for holiday spending and stick to them
• Start the process of revisiting cash flow planning
• Rethink significant expenditures – can they wait until prices and interest rates decline?

The holiday season is a time for wonder, joy, and relaxation. The new year will be with us soon. Spending time thinking through what you want to accomplish, whether it's a savings goal, investing, family giving, a big purchase, or paying down debt, is an excellent exercise to get you excited about the planning process. 

If we don't get a chance to talk to you in the next few weeks, we wish you a Merry Christmas and a happy New Year.  

_{The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities that represent the stock market in general. The Bloomberg Barclays US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate-term investment-grade bonds traded in the United States and is used for measuring the performance of the US bond market. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.} 

_{This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website. River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results.}