With few exceptions, the best and brightest in stock and bond markets failed to appreciate how the outbreak of inflation would upend the investing world in 2022. They failed to anticipate how the Fed would react, thinking rate hikes would be measured rather than decisive, and failed to foresee how that central bank strategy would trigger the worst simultaneous rout in stocks and bonds since at least the 1970s. With inflation peaking at 9.1% in June, a recession is now the No. 1 economic concern going into 2023. When businesses make less money due to lower consumer spending (triggered by dwindling reserves, price pressures and an aggressive Fed), companies lay off workers and more people are hesitant to spend.
The recession that will come this year would be one of the most anticipated ever, in part because more than a few have been predicting it since last summer. Tech layoffs are coming thick and fast as the industry pares back on staffing amid macroeconomic headwinds. The first waves occurred in the middle of last year, but are only growing in strength and numbers. Many companies hired too aggressively during the pandemic, and they are realizing that inflated payrolls and elevated costs are not holding up in the current business environment.
Future Wealth’s View
While inflation has eased recently, it is still way higher than the central bank’s desired 2% target. The CPI data due out this week could point to further drop in inflation from last month but getting to 2% is entirely another matter that could take 6-12 months. It is important for investors to understand that the Fed, having confessed that they have not made much progress on inflation, wants to decimate the stock market and slow down the economy as ways to slow down inflation. In essence, the Fed wants to destroy wealth to curtail spending.
Earlier this week, Atlanta Fed President – Raphael Bostic blithely stated that “None of the Fed models could have forecasted the extent of the inflation despite all the resources available at our disposal”. One thing is certain for investors looking for the stock market to begin a sustained rally – No bull market will resume without help from the Fed. And, the Fed is not only not inclined to help, they have no idea when inflation will be down at their target level. Our view, at Future Wealth LLC, is that a recession, possibly a deep one, is very likely.
With the Fed flying blind and a recession imminent, our strategy for our clients, that worked well last year, will be to continue to be ultra conservative and remain cautious on growth stocks. We can almost see the quote from Raphael Bostic at the Fed a year from now in 2024 – “None of the Fed models could have forecasted the extent of the recession despite all the resources available at our disposal”.