Major U.S. stock indexes fell last week amid another decline in monthly consumer inflation and a somewhat hawkish tone at the final Federal Reserve meeting of 2022.
Lower Inflation Print
Prices in the U.S. rose 7.1% year-over-year in November, marking the lowest year-over-year increase since December 2021.
Core inflation, which excludes food and energy, rose by 0.2% month-over-month, standing as the lowest monthly rise since August 2021. This data release offered an encouraging sign in the inflation battle.
Looking under the hood of the CPI data, the high-flying used vehicle market appeared to be pulling back in November, with a 2.4% month-over-month decline in pricing. Prices remain elevated, however, and there is little overall cost relief for consumers financing their purchases amid rising interest rates.
In addition, energy and energy service costs declined in November, while shelter and food pricing remained elevated.
Federal Reserve: 50 Basis Point Hike
As expected, the Federal Reserve raised the benchmark interest rate by 0.50% last week. No surprise there, and it was a welcome decline after four sequential 0.75% hikes.
The seventh and final rate hike of 2022 is in the books, and the U.S. benchmark lending rate currently sits at 4.25% – 4.50%, the highest rate in 15 years.
Seemingly Hawkish Fed Tone
While the Fed rate hike was at a lower increment than previous hikes in 2022, Fed officials expect to keep the overnight lending rate higher in 2023 than previously expected.
The forecasted Fed terminal rate (the highest rate of the tightening cycle) is now 5.1%, with a target range of 5.00% – 5.25%. Previous Fed estimates from September were for a terminal rate target of 4.6%.
The hawkish rhetoric (forecasting higher rates for longer) had a souring effect on equities and largely contributed to the overall market declines last week.
World Central Banks
The U.S. Fed was not alone in the global rate-hike crusade last week. Central banks across the globe, including in the United Kingdom, the European Union, and Switzerland, hiked their key lending rate by 50 basis points as well.
In a notable comment, Bank of England Governor Andrew Bailey told broadcasters that inflation will likely start falling “more rapidly” starting in the late spring of next year.
The United Kingdom’s benchmark lending rate now sits at 3.5%, as U.K. CPI dropped from a 41-year high of 11.1% to 10.7%.
Inflation showing its second straight monthly decline did not seem to help consumer spending in November.
Retail sales for November fell 0.6% month-over-month, which is the largest decline in 11 months. The report, released last Thursday, followed the encouraging CPI data on Tuesday and the hawkish-sounding Fed on Wednesday.
It was a busy week for the markets, and the Fed commentary on higher rates as well as the softer retail sales data dwarfed the pullback in CPI as recession fears continued to weigh.
Growth vs. Value
According to data from FactSet, many analysts expect that the 2022 S&P 500 growth rate will average 5.1%, well below the average yearly earnings growth over the last ten years of 8.5%.
In the rising interest rate environment that has been 2022, value investors have enjoyed a resurgence, with October standing as one of their best months since 1978 by some metrics.
Heading into 2023, analysts will be weighing the Fed’s speed, intensity, and rhetoric when it comes to the question of growth vs. value. Higher interest rates increase the cost of borrowing and can erode companies’ future earnings and growth prospects.
The Week Ahead
The economic data calendar is a quiet one heading into the Christmas weekend. U.S. equity markets will be closed on Monday, December 26th, in observance of Christmas.
We will get the Fed’s preferred gauge of inflation via the personal consumption expenditures (PCE) metric and consumer confidence data this week. A decline in the PCE would likely be constructive for the markets, providing some confirmation of the CPI data from last week.
With two weeks left in 2022, it’s an opportune time to discuss your investment objectives. For example, your goals – have they changed or do they remain the same? Have you discussed your capital gains/losses situation with your tax advisor – is tax loss harvesting appropriate for you?
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