December was a tough month for US equity markets with major large and small company stock indices falling more than 5%. Outside the US, markets fell but to a lesser extent. Much of the difference was due to the performance of the US dollar, which weakened.
Bond markets were modestly lower, as an uptick in rates cause bond prices to decline more than the interest income they produced. This was true of both investment grade and non-investment grade bonds. Overall, liquidity and financial conditions remain tight but relatively stable. The good news is that creditworthy companies and individuals can still access financing, the bad news is that they may not like the cost of borrowing today. Companies and individuals that are less creditworthy may find the cost of borrowing to be prohibitively expensive, if available at all.
Mid December, the Federal Reserve raised the Fed Funds Rate by 0.50%, a step down in size from previous hikes of 0.75%. The tone continues to be hawkish, with the inflation focus shifting from goods and household services (both of which seem to be trending the right way, in aggregate) to wages and employment.
We note that wages and employment numbers tend to be harder to measure and subject to numerous assumptions, material revisions, and even disputes. For example, the Philadelphia Fed’s economists believe that the number of jobs created in the second quarter of 2022 was a mere 10,500, rather than the 1.12 million that was estimated.
Fed Chair Jerome Powell referenced “expectations” numerous times in his press conference. He was talking about inflation, but those comments could just as easily be directed at markets. We think that by focusing on the area that is trickiest to measure in real time, the Fed may be trying to reduce the risk the market gets too far ahead of them.
