The major stock market averages ended notably lower last week, posting their worst week of what is still a young 2023. The Dow Jones Industrial Average lost 3% to 32,817 (its fourth consecutive weekly decline) – the Standard & Poor’s 500 Index dropped 2.7% to 3,970 – while the tech-heavy NASDAQ Composite shed 3.3% to 11,395.
The core Personal-Consumption-Expenditure price index increased .6% last month and rose 4.7% year-over-year, according to the Bureau of Economic Analysis report released on Friday. These numbers were hotter than the market expected, with forecasts for increases of .5% and 4.4% respectively. This raised worries that inflation would be sticky, and more difficult to beat. Further, the PCE is the Federal Reserve’s favorite inflation gauge and investors are concluding the Fed will now be more hawkish (restrictive monetary policy).
Other recent data coming in above expectations include the U.S Jobs Report, the Consumer Price Index, Consumer Spending, and Consumer Sentiment. This batch of data, capped off by the hot PCE number, has strengthened the case the Fed will likely do more, and has the room to do more, to fight inflation. This deepening belief the Federal Reserve will raise rates more than previously expected and will keep them there for longer than previously expected, has dampened investor sentiment. Equity (and bond) prices have been digesting and adjusting to this “higher for longer” scenario.
It was only a few weeks ago when the market painted the opposite picture and stocks were rallying on the idea inflation was coming down and the Fed was going to cut rates later this year. This is an important reminder of how the market can change its mind. There is always a fresh batch of economic data in front of us and the market can perceive things differently at different times. This Federal Reserve tightening cycle will end at some point. Trying to time/gauge an adjustment in Fed policy or the next surprising economic number is typically counterproductive.
Most important is having a portfolio and an asset allocation that is structured to fit your individual goals, objectives, risk/reward ratio, time horizon, and cash-flow needs. Investing is a marathon, not a sprint. We believe in time in the market, as opposed to timing the market!
All the best – Southport Station Financial Management, LLC