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Surprise terminal rate increase sent stocks sliding.

Surprise terminal rate increase sent stocks sliding.

December 20, 2022
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The stock market let go of recent stability and had a yo-yo week, resulting in an overall loss. A relatively positive inflation report boosted stocks early in the week and then was followed by a negative Federal Reserve outlook which pushed stocks lower.

This month’s inflation report continued to show a pattern of decreasing inflation, albeit still high, but good enough to bring some holiday cheer to Wall Street. The Fed’s decision on Wednesday to increase rates by another 0.50% was in line with what investors were expecting and didn’t move the markets. However, the Fed’s forecast of a higher terminal rate surprised investors and rattled the markets. The terminal rate is the rate they anticipate needing to hike to in order to get inflation under control. They now forecast the terminal rate to be 5.25% versus the 4.75% - 5.00% they discussed at the last meeting. Keep in mind that the forecasted terminal rate has been increasing every meeting and the Fed has been extremely inaccurate with these forecasts over the past 18 months. At this meeting they also forecasted an unemployment rate of 4.6% in 2023 which is higher than their last forecast of 4.4%. All of this is expected to cause a slowing economy in 2023 and that was enough negative news to push the stock market lower for the week.

These forecasts lead stock investors to one question: Will corporate earnings decline significantly? If the answer is yes, the stock market will most likely drop to lower lows sometime in 2023. If the answer is no, the stock market most likely will stay above the 2022 lows and advance in price. The consensus of investors that have a negative outlook is currently very high which beckons me to consider the opposite as a higher likelihood, and that earnings will continue to hold up and stocks will advance.

We are wishing you and your loved ones a very jollyholiday season!

Photograph by: Kostiantyn Li on Unsplash

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