Inflation Data Rose In December

What is it? 

Inflation in December was measured 6.5% higher than in December of 2021.* However there was a slight drop from November to December in the consumer price index (CPI) of 0.1%.* This was not much of a surprise as those numbers were just about what was estimated. 

From November to December this was “a welcome downtrend in consumer prices after the Federal Reserve raised interest rates to the highest level in 15 years.”*

Why does it matter?

“On a ‘core’ basis, which strips out the volatile food and energy components of the report, prices climbed 5.7% year-over-year and 0.3% over the prior month. The core CPI readings were also in-line with forecasts.”*

This may point to a more accurate measure of inflation. Excluding food and energy to get a better look at the rest of the economy, we can see that inflation is continuing higher. Oil had a recent drop in value that may have impacted the CPI number which tends to get more focus. 

“Policymakers monitor ‘core’ inflation closely due to its nuanced look at key inputs like housing, while the headline CPI figure has moved largely in tandem with volatile energy prices over the last year.”*

This is important because it impacts the next Fed decision on interest rates. While the government is busy spending money with little regard for inflation, the Fed is trying to counteract the inflation and regain price stability. If CPI had a larger drop then maybe markets would have reacted abruptly. Until we see a clear sign of inflation being well under control it is likely that the Fed will maintain its hawkish stance. What that means for stocks is a contracting environment for the foreseeable future. If CPI begins to have consecutive months of lower CPI then the markets will likely respond with more confidence. Currently there is more uncertainty. Once rates stop rising or even get reduced, then stocks will be better positioned to appreciate in value. 

Q4 Earnings Expected to Impact Stock Prices

What is it? 

The fourth quarter earnings of 2022 started on Friday of last week before the market holiday for MLK day this Monday. 

“On one side are those who believe the outlook has already been lowered enough to provide a springboard for better-than-expected results and stock gains, while on the other side are those believing that lackluster results and downbeat forward guidance will trigger further declines.”**

Why does it matter?

“With the S&P 500 SPX, +0.34% rallying over the past three months, the bulls seem to have the advantage. But there are also reasons to believe the bears could regain control once the flood of earnings reports kicks off before Friday’s opening bell with a host of big-bank earnings.”**

Many companies have mentioned they need to fire thousands of workers as earnings estimates have come down from a year ago in most cases.

“The fourth-quarter estimate was lowered much more than historical averages amid growing concerns that a recession was coming. The question is, will enough companies beat expected earnings, and will they beat by enough to favor the bulls?”**

While that is unknown we are confident that our process will lead us in the right direction. We look forward to making adjustments to portfolios if and when conditions change. However, when analyzing charts there has not been enough strength in terms of trend or momentum to be fully invested in many positions. 

Other articles we found interesting this week:

Dow futures fall more than 200 points as bank shares decline on recession fears

Wells Fargo profit falls 50% on higher reserves, costs

updates to student loan repayment

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Our last 401(k) portfolio reallocation: 5/19/2022. 

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Our process attempts to identify trends and momentum in the financial markets. With that information, we align our clients’ portfolio accordingly in the hope to help our clients accomplish their life goals while attempting to lower the risk of a large drop in their portfolio.

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Sources:

*Alexandra Semenova. “December CPI: Inflation rises 6.5% over last year”. 1/12/2023. Yahoo Finance. https://finance.yahoo.com/news/december-consumer-prices-inflation-data-cpi-january-12-125134163.html

**Tomi Kilgore. “Why earnings season could be a ‘market-moving event’”. 1/12/2023. Market Watch. https://www.marketwatch.com/story/why-earnings-season-could-be-a-market-moving-event-11673556517?mod=home-page

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