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December 22, 2022 at 02:08 PM
What You Need to Know
- Inflation remains high, but we are not in a recession.
- At some point, the Fed will eventually pivot on interest rates.
- When that happens, you’ll want your portfolio to be prepared.
The bears returned to Wall Street last week after the Fed hiked its key rate another 50 basis points at its final meeting of 2022. The latest move from the Federal Open Market Committee should not have come as a surprise. Yes, we’ve seen a couple of months of positive inflation data, and it seems to be heading in the right direction.
But inflation remains high, and the Fed will not pause or pivot until it comes down to its preferred range. (Which isn’t likely to happen until the second quarter of 2023 at the earliest.)
To add to the negative sentiment, the Fed’s dot plot is now at 5.1%, which is slightly above where expectations were ahead of this week’s meeting. But again, Powell already warned us that rates are going to stay higher for longer into next year. This isn’t going to change overnight — or over one cool inflation report. Powell last week, again, reminded us that the current strong jobs picture is not in line with the Fed’s fight against inflation.
The good news is that we are not in a recession right now. Even though retail sales fell more steeply than expected in November during the holiday shopping season kickoff, there is momentum in the economy. It is not all gloom and doom. The preliminary University of Michigan consumer sentiment index rose to 59.1 in early December from 56.8 in November, so sentiment may be turning a corner as we close out the year. Many have counted it out, but keep in mind there is still time for a rally.
And don’t forget that we have already priced in a lot of bad news this year. The S&P 500 is down more than 18% YTD, while the tech-heavy Nasdaq Composite is down more than 30%. I think now is the perfect time to start to nibble a bit in this washed-out market — and that is what I have been doing.
Now is the time to think long term and look for those best-in-class, blue-chip companies that are now selling for cheap. At some point in 2023, the Fed is going to pivot, and nobody will want to be left out of the resulting rally.
