In comments on the market, Daniel Berkowitz, investment director for investment manager Prudent Management Associates wrote:
Earnings Matter
A Fed-bounce and strong earnings from Meta Platforms Inc (NASDAQ:META) have provided another day of gains for equity investors. The rise in stock prices is certainly welcome as we turn the page from an abysmal year in 2022.
Q4 2022 hedge fund letters, conferences and more
With that said, we aren’t surprised that markets are brushing off Fed guidance regarding the future path of interest rates - the markets haven’t been buying what the Fed is selling for some time now.
The rally in asset prices, in particular for those that were punished last year (like growth stocks and cryptocurrencies), generally reflects expectations that the Fed will have to cut rates throughout 2023 in response to economic slowdown.
While this certainly isn’t an unreasonable outcome, we view it as a less likely scenario than the Fed sticking to its word and holding rates steady for the remainder of this year after reaching the desired terminal rate. Chairman Powell has noted that entrenched inflation is the worse of two evils when weighing inflation relative to a potentially steeper recession.
At least part of today’s positive reaction is also related to the fact that Powell didn’t push back as forcefully as he could have (and has before) about the divergence in Fed-market expectations and the recent loosening of financial conditions.
Employment-Cost Index Remains Stubbornly High
From our perspective, already seemingly forgotten by the market is Tuesday’s employment-cost index reading, which remained stubbornly high at 5.1% year-over-year. Though the data showed movement in the right direction, current levels of wage growth are still running a few percentage points too hot to be consistent with the Fed’s 2% mandate.
The unemployment data released today showing a further decline in claims only further highlights the labor market’s current strength.
The Fed is increasingly watching the labor market for signs of protracted inflation. Strong wage growth fuels inflation in that it’s often passed through as a cost via higher prices for consumers in addition to further buttressing consumer spending.
And since the “transitory” pivot, the Fed has been explicit in that it will seek to avoid any echo of the 1970s wage-price spiral at all costs. Therefore, when Chairman Powell says the Fed has “more work to do”, we are not at this point in time as inclined, as the wider market appears to be, to dismiss his word.
About Prudent Management Associates
Prudent’s core investment philosophy focuses on minimizing risk over time. As a result, the company does not react to market events, but rather considers them in a larger context to develop a long-term outlook for the development and maintenance of investment portfolios.
