A speech from Fed Chair Jay Powell on Wednesday sent markets flying amid signals that the central bank could begin slowing its aggressive interest rate increases. When the dust settled at the end of the session, the Nasdaq closed up a whopping 4.4%, while the S&P 500 and the Dow finished the day ahead by 3.1% and 2.2%, respectively. Then, Friday arrived and stocks fell sharply after the data revealed non-farm payrolls rose by a greater than expected 263,000 and the unemployment rate held steady at 3.7% in November.

In the Q&A session on Wednesday, Jay Powell made some remarks that had most economists scratching their heads. While recognizing that the yield curve suggests a recession in 2023, Jay Powell seems to imply that somehow inflation can be reduced without raising the unemployment rate materially, leading to a soft landing.

Future Wealth’s View

The Phillips curve, a fundamental economic theory, states that inflation and unemployment have an inverse relationship. Higher inflation is associated with lower unemployment and vice versa. By that definition, if unemployment stays low, inflation will stay high and cannot be decreased.

While the Fed may want to see inflation come down with just a modest increase in unemployment, the reality may be quite different – inflation may remain high and sticky. Which brings into question the comments made this week by Jay Powell – a slow down to increase rate hikes while expecting inflation to come down even as unemployment stays low.

The stock market wants to rebound on the prospect that a recession could be successfully averted by some astute maneuvering by the Fed. But, as we have stated before in previous reports, the Fed has been wrong in the past and will be wrong again. Our view, at Future Wealth LLC, is that 2023 will see a significant decline in corporate earnings that will force a series of layoffs that will eventually raise unemployment levels which will in turn, bring inflation down to levels that pleases the Fed. But, the stock market won’t take rising unemployment and the decline in corporate earning so kindly.

In 2023, the stock market is going to be a tough place to be and investors will do well to take shelter in ultra safe investments – brokered CDs, municipal bonds and inflation protected securities – all of which will likely provide better returns until the stock market recovers in mid 2023 or later.