January 23, 2023
Forefront‘s Monday Market Update
The Important Data to Watch
Twenty-three days into the new year, I have already heard enough nonsensical economic statistics and predictions to spin my head. Of course, it isn’t a recent phenomenon, but on top of the talking heads on TV, we are now inundated with social media “experts” giving their opinion and more than likely trying to sell you something.
My job as a financial planner is to help you wade through the muck of useless data because all that useless data is doing nothing but giving you financial anxiety. So, what data should we look at in 2023 to get an idea of what’s coming?
Caveat: if this data alone could predict the future, I would be writing this, and you would be reading this from our private islands in the Caribbean, where we trained monkeys to fan us with those gigantic leaves.
Housing prices climbed nearly 40% during the pandemic, and we watched as mortgage rates went from 3% to 7% in 2022 following a hyper-aggressive Federal Reserve.
Housing makes up about 20% of the US Economy, and with interest rates making mortgages far more expensive, watching what happens with mortgage rates will be significant for 2023. Thankfully, we have seen rates decrease from the 7+% high to around 6% when writing this. A rough estimate is that for every 1% mortgage rates drop, mortgage payments fall by about 10%.
Before I go on, let’s clarify two things. First, this works in the opposite direction as well. If rates fall and you have a fixed-rate mortgage, your mortgage payment does not change. It is only for NEW borrowers.
Mortgage rates do not necessarily need the Federal Reserve to cut rates to come down a bit more; lenders want stability in rates, so they know if they lend you hundreds of thousands of dollars today, they couldn’t have made more money lending it to you in two weeks when the Fed raised rates. So an indication that rate hikes have stopped or will stop soon will help lenders gain clarity, hopefully bringing rates down.
My observation is that while people are still gainfully employed, earning income, and consuming, it is a tall order to have an economic recession. As crazy as it might sound, we have heard the Fed say, out loud, that they would like to see unemployment INCREASE to slow inflation. I must believe the people making up The Federal Reserve are far more intelligent than I am, but does that seem stupid to anyone else?
A strong labor market is good for our economy, no matter how you look at it.
The Millennial Generation has heard about inflation our whole lives but has only really experienced it once we paid $7.99 for a dozen eggs. Of course, eggs are a terrible example because the price increase is mainly due to Avian Flu wiping out 30% of the egg-laying chickens across farms in America. Still, it doesn’t make the reality of the cost of eggs any different.=
Inflation is, thankfully, moving down, even if it isn’t reflected in eggs. The downward trend seems to be a path we will continue to follow, but a plateau at these high levels would still spell disaster. It would mean the Fed keeps tightening, almost certainly sending us into a recession. On the flip side, if inflation falls too quickly, sending us into deflation might push us into a recession.
This is a crucial piece of data that will be watched closely.
The Fed Funds Rate
The stark reality is that the other three pieces of data are directly tied to what the Fed decides to do with the Fed Funds Rate. Do the rate hikes continue, or do they give the economy some time to breathe?
So how does this impact all of you?
Paralysis by analysis is very easy to have. Focus on key pieces of data and tune out the noise.
The stock market calendar this week:
|MONDAY, JAN. 23|
|10:00 AM||Leading economic indicators|
|TUESDAY, JAN. 24|
|9:45 AM||S&P U.S. manufacturing PMI (flash)|
|9:45 AM||S&P U.S. services PMI (flash)|
|WEDNESDAY, JAN. 25|
|THURSDAY, JAN. 26|
|8:30 AM||Initial jobless claims|
|8:30 AM||Continuing jobless claims|
|8:30 AM||Real gross domestic product, first estimate (SAAR)|
|8:30 AM||Real final sales to domestic purchasers, first estimate (SAAR)|
|8:30 AM||Trade in goods (advance)|
|8:30 AM||Durable goods orders|
|8:30 AM||Core capital goods orders|
|8:30 AM||Chicago Fed national activity index|
|10:00 AM||New home sales (SAAR)|
|FRIDAY, JAN. 27|
|8:30 AM||Real disposable incomes (SAAR)|
|8:30 AM||Real consumer spending (SAAR)|
|8:30 AM||PCE price index|
|8:30 AM||Core PCE price index|
|8:30 AM||PCE price index, year-over-year|
|8:30 AM||Core PCE price index, year-over-year|
|10:00 AM||UMich consumer sentiment index (late)|
|10:00 AM||UMich 1-year inflation expectations (late)|
|10:00 AM||UMich 5-year inflation expectations (late)|
|10:00 AM||Pending home sales|
Most anticipated earnings for this week:
About Amit: I am a first generation American, the son of a working-class Indian family, and I lived through my parents’ struggle to find their place in this country, to put down roots that would sustain them as well as their children in a new land. As they encouraged me to excel in school and fostered my hobbies and interests, I was keenly aware of the dynamic between them. I understood that there was a difference between where they came from individually and where we were now. They worked hard in their individual capacities, but they weren’t always on the same page about financial issues – and that can make or break a family’s future. I didn’t know it at the time, but this laid the groundwork for my passion towards financial services and helping families succeed.