The US economy is cooling just like the Federal Reserve wants, but growth hasn’t stalled—also as the Fed wants. While US gross domestic product for the last quarter exceeded estimates, the central bank’s preferred inflation measure – PCE, slowed to its lowest pace in more than a year. Together, these data points make it likely the Fed will, as expected, downshift the size of its interest rate hikes when it meets next week. But there’s danger lurking. If the Fed backs off monetary tightening too soon, inflation could again climb, this time on the back of a still-tight labor market. And inflation’s bite remains evident despite its decline – soaring American credit card debt and automobile repossessions are harbingers of more serious problems to the economy.
The mass layoffs have begun – Meta hacked 18,000 jobs, Microsoft cut 10,000, Alphabet eliminated 12,000 and that’s just the tip of the iceberg. When people lose their jobs, consumer spending declines, businesses are impacted by lower sales numbers, more people lose their jobs and the cycle continues leading to a recession.
The irony is that this was all engineered by the Fed.
Future Wealth’s View
Stocks closed a winning week Friday following data that pointed to stronger than expected U.S. economic growth when the Fed is actually looking to slow down the economy. The market has been wrong before and will likely continue to be wrong again. The main reason is that the stock market is filled with optimists who cannot entertain the thought of a recession. Many of the market participants have not been around to have seen or witnessed a major correction or recession and are in desperate denial after a disastrous 2022.
Investing in this environment is challenging. The easy part is to stay away from all the discretionary stocks – Peloton, Blue Apron, DoorDash, Airbnb and host of streaming companies, restaurants, travel companies, airlines etc. Instead, investing in consumer staples, utilities, industrials and dividend paying value stocks would be the way to go.
Next week’s Fed meeting will set the course for the rest of Q1 2023. The market wants the Fed to signal that they will stop raising interest rates but we, at Future Wealth LLC, believe that the Fed is unlikely to stop until they see inflation drop even lower to the 2% level that is the Fed target.
Tune in to the call with the Fed. You do not want to miss the fun.