Investors have been on pause since early 2022 with their new investments to determine when the Federal Reserve rate hikes will cease. More importantly, they are concerned that higher interest rates will drive the US economy into a recession. The Federal Reserve began its rate hike policy on March 17, 2022, which continued throughout the year. Below is a list of all rate hikes in 2022 following their Federal Open Market Committee (FOMC) meetings:
Jerome Powell, Federal Reserve Chairman, stated in March 2022 that their target goals were to lower inflation based on several indicators that, include the Consumer Price Index (CPI) to 2%. The committee projected that they would need to raise the Federal Reserve discount rate from 0.25% – 0.5% to 5.0% to 5.5% to achieve their target inflation goal.
As we have opined in previous Weekly Briefs, there are many solid indications that inflation is near their target rate and potentially the end of the rate hike campaign.
As the index shows, housing market activity is one of the first areas to show weakness due to consumer spending due to the dramatic impact rising interest rates have had on housing. House prices peaked in the summer of 2022 and since have steadily declined in price, as reported by the National Association of Home Builders/Wells Fargo. The recent decline breaks a decade-long consecutive trend of increases in the index going back to 2012.
However, the combination of a 100% increase in mortgage rates and weakening housing prices has resulted in a fast drop in existing house transactions. In fact, the number of house transactions has only been this few during two periods in the past 30 years, and both were the result of catastrophic economic collapse. The most recent low level of transactions was in 2020 during the worldwide pandemic.
Before 2020, the time before that was 2008, the worst housing crash since the great depression. Prior to 2020, the next lowest level of sales was 1995, when there simply were fewer people and houses.
The positive news is that mortgage applications are improving slightly and housing prices are stabilizing, which will result in more transaction activity in the housing market. Many other factors of inflation are declining including gas prices, food prices, and the goods and services consumers buy daily. The net result of all these improvements in inflationary factors is that the Federal Reserve will be required to raise rates for a shorter period than originally projected and will likely begin lowering rates by year-end or early 2024.
In other words, a soft landing to the slowing of the economy and the 2022 stock market selloff.
The S&P 500 had maintained a positive trend since October 14, 2022, when it bottomed at its lowest level 2022. As of today, the S&P 500 has crossed above its 20-Day Moving Average (DMA), 50 DMA, and 200 DMA.
NASDAQ, which has had quite a volatile ride these past three years and a solid rally so far in 2023, has crossed above its 20 DMA and 50 DMA and just approaching its 200 DMA.
Watching the index respective DMA’s is akin to monitoring baseball players’ batting averages. Attempting to determine when a player may recover from a slump can be identified when their batting averages start to improve. A few good hits will not change a longer-term average; however, as the player is more productive at-bats over durations of weeks, the average will begin to improve. The same is true for monitoring DMA’s of stocks and market indices. We are watching several indices and key stocks in specific sectors and will continue to monitor and keep you updated.
Anton Bayer
