The Consumer Price Index (CPI) report that measures inflation ended up being a nice Christmas surprise. The report came in at 7.1%, beating the expectation of 7.3%. The market took that in stride and rallied on the good news. The report also showed some of the transport costs coming down, which is also a good sign. However, one negative thing in the report that stuck out is that food and beverage costs are still elevated. We need that to come down but overall, it was a solid inflation report that the market enjoyed.
In last week’s vlog, we talked about the two big data points we were watching for. One of those being inflation and the other being the Fed. We said that inflation needed to be below 7.3% and the Fed’s decision on interest rates needed to be at or below the expected 50-basis point rate hike. Well, inflation did its part and the market rallied from Tuesday morning when the report came out through Wednesday into midday when the Federal Reserve announced its decision. Jerome Powell came out, despite the better-than-expected inflation data, and gave comments about the dot plots of what the Fed projects the interest rates to be going forward. The plan is much more aggressive than expected. They did raise rates by 50-basis points in line with expectations, but it’s what they said about future rate hikes that were much more aggressive than what the market thought considering inflation coming down. However, what was interesting is after those comments, the market did sell off for the rest of the day and through the week, but long-term interest rates came down. That tells us what the bond market and the stock markets are expecting. Even though the Fed says they’re going to raise rates, they’re likely not going to be able to because the Fed has already misjudged the economy and we might be heading into recession, which will cause the Fed to raise rates and then quickly turn around and cut rates because they’ve moved the fed funds rate too high. Interest rate expectations for their federal funds rate fell despite the Fed saying that they would raise rates further. It’s a little confusing but what the market is telling us is that the Fed is on the wrong side of fighting inflation.
The S&P 500
If you have watched our vlogs this past year, you know that we have stayed focused on inflation and the actions of the Federal Reserve. There are many reasons why we have been focused on these things, but one reason can be seen in the chart shown in this episode that highlights the average daily return of the S&P 500 and its different sectors. It shows that for all Consumer Price Index release dates since the Fed began raising rates in March of this year, the returns were bifurcated between days when year-over-year core CPI came in above or below estimates. In terms of the broader market, the S&P 500 has posted average returns of 2.4% when core CPI is surprised on the downside. We show this because we hope that inflation numbers will continue to trend down in the new year and the market will react more positively to these lower inflation numbers. It’s something we will continue to watch every day and continue to talk about in our vlogs in the new year.
Bobby Norman, CFP®, AIF®, CEPA®
Email Bobby Norman here
Trey Booth, CFA®, AIF®
Chief Investment Officer
Email Trey Booth here
Associate Vice President
Email Ty Miller here
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Economic forecasts set forth in this presentation may not develop as predicted.
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