Markets were relatively calm for the first half of April, despite continuing concerns over inflation and interest rates. While inflation has peaked and is trending downward, questions remain as to how the Federal Reserve (Fed) will respond.
Headline Consumer Price Index (CPI) rose only 0.1% for the month of March, which equaled a 5% year-over-year rate – a significant drop from last month’s 6% reading. That 5% reading is the lowest level in nearly 2 years. While Core CPI remains closer to 5.6% year over year, rates have steadily trended down since last December.1
The Fed would like to see inflation rates around 2% so the question remains: will they continue their policy of raising interest rates or will they pause to see if the actions they’ve already taken will continue to drive inflation down.
Adding to the Fed’s decision is data on hourly wages. Increasing wages can have an inflationary impact. After peaking in March of 2022, at a rate of 5.9%, wage earnings have declined to 4.2%, and much of that increase has been eroded by higher consumer inflation. Furthermore, while higher inflation impacts all, the wage increases have not benefitted all workers.
As for new job creation, many small business owners are delaying plans to fill open positions (or create new jobs) over the next 3 months, as reported by the NFIB.2
So, inflation is trending downward, wage growth is slowing, and hiring is declining – all signs that the Fed’s policies are working. Nevertheless, we may see the Fed raise rates at the next regularly scheduled meeting in May. If the Fed does increase rates in May, most economists predict a 0.25% hike, which is widely anticipated to be the last rate hike this year.
Now the challenge becomes engineering an economic slowdown without pushing the economy into recession. We remain hopeful that the Fed is up to the task!
Earnings season for the first quarter began last week and the markets will be paying close attention to these estimates. Overall expectations are for softer numbers as slowing demand outweighs improving economic conditions. The strong dollar will likely limit foreign sales. If earnings estimates are revised down we may see volatility pick up in the coming month.
Reviewing returns for the first half of April, the markets were mixed. As of March 14th, the Dow rose 612 points (1.84%), the S&P 500 gained 28 points (0.69%) and the NASDAQ dropped 98 points (0.81%).
1,2 www.jpmorgan.com “Will the March CPI print force the Fed to hike in May?” April 17, 2023
3www.am.jpmorgan.com “Weekly Market Recap” April 17, 2023
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. Past performance is no guarantee of future results. No person or system can predict the market. There is no guarantee that any strategies discussed will result in a positive outcome. All investing involves risk and no investment strategy can guarantee a profit or protect against loss, including the potential loss of principal. S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. The NASDAQ is an index that tracks the cumulative results on a market capitalization basis of all stocks trading in the NASDAQ system. The Dow Jones Industrial Average is a widely watched index of 30 American stocks thought to represent the pulse of the American economy and markets. Investors cannot invest directly in an index. Diversification does not guarantee a profit or protect against a loss.