Written by: Angela Akers
The Federal Reserve had its final meeting of 2022 last week and raised interest rates by 50 basis points, from 4.25% to 4.50%. Fed Chair Jerome Powell set expectations that the Fed funds rate will increase to between 5.00% and 5.25% by early next year and remain at that level throughout 2023. So, the hopes of relaxing their rate policy next year were dashed. Investors reacted by dumping stocks and that continued for the better part of the week.
As Chairman of the Federal Reserve, Mr. Powell has a dual mandate of maintaining monetary stability and full employment. A robust economy is required to achieve full employment, but inflation, enemy number one of price stability, rears its head when the economy is robust. Therefore, the Fed raises interest rates to keep the economy from overheating to the point of rampant inflation. Herein lies the first problem.
Due to the coronavirus in 2020, many people lost their jobs and unemployment was high throughout 2020, but began to abate in late 2021. During that time, the Federal Reserve was focused on maintaining full employment, remarking that rising inflation was transitory. The Fed’s first meeting of 2022 was in late January when the Consumer Price Index was already at a 39-year high of 7.00%. The Fed continued to say inflation was transitory. By the mid-March meeting, the Fed could no longer deny that inflation was here to stay, at 7.90%, and chose to begin raising interest rates, by a mere 25 basis points. By the time the Fed began to take any action against inflation, the economy was already red hot. The Fed was late to the party.
Here we are in the final weeks of 2022 and inflation has begun to abate and unemployment remains at a low rate of 3.7%. However, there have been some clues that the tide of the economy is in transition. It was reported this week that Housing Starts fell 0.5% and Existing Home Sales fell 7.7%. Even among Black Friday and Cyber Monday sales, it was reported last week that Retail Sales took a hit for November, with the biggest drawback in vehicles. Consumers are reluctant to buy houses or cars due to high-interest rates and concerns over an impending recession.
Another indication of a turning economic tide is that the earnings outlook for the coming quarter, according to FactSet, is forecasted to decline by 2.8%. VectorVest’s measure of earnings health, the Earnings Trend Indicator, ETI, has been steadily falling since May 27, 2022. As of tonight, the 50-Day MA of the VV S&P500 WatchList Average EPS, fell another $0.02 per share to $9.16 per share and our Market Climate Graph shows that the Earnings Trend Indicator, ETI, also fell another 0.01 point to a level of 1.06. So the rate of decline in our ETI has fluctuated from 0.01 point/week to 0.02 points/week. At this rate, we could see it fall below 1.00 within the next three to four weeks. If the ETI falls below 1.00, it will put us into a rare Case 5 Bear Market Scenario in which earnings and inflation are falling, while interest rates are rising. As always, we’ll keep a close eye on the ETI and you informed.
A true Bear market, according to the Truth Chart, with falling earnings and rising interest rates could spell disaster for the economy. Chairman Powell and his mighty band of inflation fighters plan to keep interest rates high through 2023 and that won’t be good for the economy or for earnings. Their preferred measure of inflation, Personal Consumption Expenditures, came in higher-than-expected today and that’s an indication to the Fed that they should stay the course. And sadly, by the time the Federal Reserve decides to take action in a different direction, it will likely be too late. It seems they’re always a step behind and have the inability to pivot appropriately. Dr. DiLiddo refers to this as The Fed’s Folly.
As we wrap up 2022, rising interest rates, high inflation, and waning earnings aren’t encouraging. No matter what the US Federal Reserve does, VectorVest will be with us every step of the way. The Color Guard will tell us when it’s OK to buy stocks and when it’s not OK. When it’s OK to buy, VectorVest’s proprietary analysis will help you buy safe, undervalued stocks that are rising in price. And we will teach you how to do just that. Education is the key to unlocking your best financial future. So, VectorVest is gifting all of our subscribers a special $100 voucher good towards some of our most popular courses. Please CLICK HERE to take advantage of our gift to you! It’s the next best thing to Santa dropping off a stock market rally in the coming week!
From all of us here at VectorVest, we’re wishing each and every one of you a very Merry Christmas and a Happy New Year!
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