The Markets
It's the lag time.
To no one's surprise, the Federal Reserve continued to battle inflation last week, raising the federal funds rate for the fourth time this year, reported Claire Ballentine of Bloomberg. The Fed is making borrowing more expensive to dampen demand for goods, which should lower inflation – but it's not a quick fix.
Rate hikes are kind of like winter planting. In cold weather areas, people sometimes spread grass seed in November with the expectation that it will germinate the next spring. It's similar for rate hikes. The Fed lifts rates with the expectation that the increases will work their way through the economy over the next 12 to 18 months and bring inflation down, reported Matt Levin of MarketPlace.
That lag time can make it difficult for the Fed to know when it has done enough.
Over the last eight months, the Fed's benchmark rate has increased from near zero to 3.75 percent, reported Nicholas Jasinski of Barron's. Over that period, inflation, as measured by the Personal Consumption Expenditures (PCE) Price Index, has moved slightly lower. In March, the headline PCE Price Index was 6.6 percent, year-over-year. In September, it was 6.2 percent. The core PCE Price Index, which excludes food and energy prices, was 5.2 percent in March, year-over-year, and 5.1 percent in September.
Last week's unemployment report showed the economy remains strong, but there were signs that Fed rate hikes are beginning to have an effect. The rate of new jobs growth slowed even as U.S. businesses reported stronger-than-expected hiring increases, reported Jeff Cox of CNBC. Jobs gains were spread across industries, and average hourly earnings increased. In addition, the number of layoffs rose, although the number remained at historically low levels, according to Augusta Saraiva and Reade Pickert of Bloomberg.
Last week, major U.S. stock indices finished lower. Treasury yields rose across all maturities as investors priced in the expectation that the Fed will keep raising rates into 2023.
S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend)
and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.
Sources: Yahoo! Finance; MarketWatch; djindexes.com; U.S. Treasury; London Bullion Market Association.
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.
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Womack Investment Advisers, Inc.
Sources:
https://www.bloomberg.com/news/newsletters/2022-11-03/fed-rate-hikes-may-slow-but-they-re-not-stopping-as-inflation-rages (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/11-07-22_Bloomberg%20Wealth_What%20Will%20It%20Take%20for%20the%20Fed%20to%20Stop%20Hiking_1.pdf)
https://www.marketplace.org/2022/10/28/how-long-does-it-take-for-fed-rate-hikes-to-work/
https://www.barrons.com/articles/the-stock-market-keep-falling-as-rates-keep-rising-why-you-cant-fight-the-fed-51667603559?refsec=the-trader&mod=topics_the-trader (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/11-07-22_Barrons_Stocks%20Dropped%20Because%20the%20Fed%20Will%20Keep%20Raising%20Rates%20Until%20Inflation%20Breaks_3.pdf)
https://www.bea.gov/sites/default/files/2022-04/pi0322.pdf
https://www.bea.gov/news/2022/personal-income-and-outlays-september-2022
https://www.cnbc.com/2022/11/04/jobs-report-october-2022-.html
https://www.bnnbloomberg.ca/us-adds-jobs-at-robust-pace-underscoring-labor-market-strength-1.1841864 (or go to https://resources.carsongroup.com/hubfs/WMC-Source/2022/11-07-22_Bloomberg_US%20Jobs%20Top%20Forecasts_7.pdf)
https://www.espn.com/mlb/story/_/id/29107741/tim-kurkjian-baseball-fix-odd-unbelievable-live-superstitions-baseball-players
https://en.wikipedia.org/wiki/1929_World_Series
https://www.nber.org/research/data/us-business-cycle-expansions-and-contractions
https://finance.yahoo.com/quote/%5EGSPC?p=%5EGSPC [Choose chart]
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https://www.goodreads.com/quotes/tag/superstition