Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.
It’s been a while since we’ve had an update. As a recap, in the weeks prior to the holiday season, we had established major lows back in October but were still stuck in a downward trading pattern of lower highs and lower lows. Since then, that patter may have changed a bit. The month of December was spent in a very tight and very volatile trading pattern that ended in a rally with reasonable exit velocity.
In the news this week, it appears that Europe will escape the worst of this year’s winter, lowering energy prices for the energy starved economy, and could allow them to escape a recession altogether. Tesla cut prices across its fleet. And inflation slowed for the sixth straight month, falling to 6.5%.
Here is a graph of that inflation rate, given by the Bureau of Labor Statistics, showing significant declines of the inflation rate since the middle of the summer. However, the rate is still well over the historical average and the target rate from the Federal Reserve so more progress needs to be made here.
I don’t think the Federal Reserve is paying much attention to CPI, though, and here’s why. The labor market is still unusually strong meaning there’s a ton of job openings and increasing wages throughout the economy. Now that may not sound like a bad thing but when these dynamics are out of balance with economic production within the economy, then you get 1970’s-like demand-driven inflation. Here is the number of reported job openings. While it has pulled back some, it’s still way above normal. Likewise, the unemployment rate remains very low, the lowest in 50 years. And nominal wage growth remains unusually high. If this wage growth remains unusually high without economic production keeping up, then there’s too much money chasing too little in goods and services, driving inflation higher once again. In other words, an unusually strong labor market causes demand-driven inflation which will cause further intervention from the Federal Reserve. So I would say we’re quite out of this thing yet albeit progress is definitely being made.
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1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved January 13, 2023, from FactSet Database.
2.US Bureau of Labor Statistics. “12-month percentage change, Consumer Price Index, selected categories (past 20 years).” Updated January 12, 2023. Retrieved from https://www.bls.gov/cpi/
3.JP Morgan Asset Management. “JP Morgan Guide to the Markets.” Slides 26 & 27. Updated December 31, 2022. Retrieved from https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/
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