February Market Commentary: The Fed's Not Done

February Market Commentary: The Fed's Not Done

February 21, 2023

An old market adage is “as January goes, so goes the year.” Is it true? According to CFRA, the market has historically gained in the remaining 11 months since World War II, 85% of the time following a positive January. So it’s an especially good start when the S&P 500 rallied 6.28% in the first month of the year.   

Further, the average gain for the S&P 500 following a negative year is about 14%. History is seemingly on our side for a good year, but does that mean we are out of the woods yet?

Let’s look at the data:

  • 12-month CPI was 6.4% in January. That number was higher than analysts expected, with increases in shelter, food, and energy prices. 6.4% is far too high, and there’s a long way to go, but this is the seventh straight month of easing inflation.  
  • The Jobs report showed an increase of 517,000 in January. Analysts expected 187,000 jobs added; the 517k that came in absolutely crushed estimates. The unemployment rate also fell to the lowest level since May of 1969. For historical context, that’s the year we landed on the moon. In a way, it is good to have people working; it shows the resiliency of the economy even with a tightening monetary policy. On the other hand, though, it’s another sign that we have a ways to go in the inflation battle.   
  • Fourth quarter real GDP rose 2.9%, according to the U.S. Bureau of Economic Analysis’s first estimate released on January 26th. The Atlanta Fed’s GDPNow model estimate of 1Q has been rising in recent weeks and is now estimated at 2.5%. 

What Does All of That Data Add Up To?

Every February 2nd, Punxsutawney Phil emerges from his burrow, looks around, and looks for its shadow. A superstitious tradition to estimate the coming of spring. This year, the little guy did, in fact, see his shadow and retreat back into its hole, hiding from more of the same winter weather.   Unfortunately, we also have Groundhog Day with the markets, with the main storylines the same as it has been for just about all of last year. Inflation and the Fed. 

Remember that the Fed has a dual mandate of maximum employment and price stability. We have had seven straight months of “disinflation,” it is still far too high, and certain parts of the CPI number are proving sticky (we are looking at you shelter costs). The labor market is also probably too hot, likely contributing to shortages and increases in prices. In other words, we are probably beyond maximum sustainable employment if we want price stability.  

There have been signs things aren’t running as hot, and as a result, the Fed slowed down their rate increases recently, from 75 basis points in November to 50 basis points in December and, most recently, 25 basis points in February. After the February increase, the market took Jerome Powell’s comments as dovish, or less aggressive, towards tightening the economy. That tone may change, though. After some of the recent data, 2 of the voting members of the Federal Reserve have come out and said they would have supported a larger rate increase at the last meeting. 

Given the strength of the labor markets, high inflation, and the Fed’s commitment to following the data, the market will keep looking for any clue trying to guess the Fed’s next move. Barring something completely unforeseen, more interest rate hikes should be expected even after the steepest rate increases historically. Volatility is likely to continue around any headline about jobs or inflation.

Source: Federal Reserve. Chart: CION


  • The S&P 500 is up 6.5% YTD through 2/17/23
  • MSCI EAFE (International Index) is up 7.47% YTD through 2/17/23
  • The Barclay’s Aggregate Bond Index is up 1.07% YTD through 2/17/23

Source: Kwanti

 The Smart Investor

The watchword for this year is patience. A strong January makes for a good start to the year, but volatility is likely still in the offing. Until the terminal rate for the Fed is clearly in view, markets will react to ongoing data.

Keeping a big-picture focus can be valuable in your financial planning and in your investment strategy. Things are getting better, even if the road looks bumpy. Stick to your long-term plan and avoid trying to time the markets as you get to the home stretch on this Fed rate cycle.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities that represent the stock market in general. The Bloomberg Barclays US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate-term investment-grade bonds traded in the United States and is used for measuring the performance of the US bond market. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East. 

This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website. River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results.

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