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What a way to start 2023!

Wonderfully, January rewarded us with about a 9.9% average gain in our investment portfolios! While the Fed’s decision to reduce the rate of interest rate increases to 0.25% has helped the stock markets, it was the near 40% gain in Meta, 25% in Amazon, and 20% in Google that gave us a huge lift. On the back of strong earnings, Meta’s win against the FTC, and the strengthening of cloud computing, our technology bets during the downturn have begun to pay off.

Federal Reserve.

During remarks on February 1, the Fed Chairman quickly got to the heart of the matter. While they have raised interest rates by an eye watering 4.5% over the last year, as well as significantly reduced the size of the Fed balance sheet, they still face some challenges ahead. Of course, by the Chairman’s own admission, it takes about a year to see how these changes will shake out in the economy. But it’s better to overshoot their goal to bring inflation down to their 2% target than to miss and endure entrenched inflation.

The good news is that the Fed has made substantial progress bringing the top line inflation down to 6.5% from a near 10% high last July. The core inflation rate is down around 5.4%, excluding the volatile food and fuel sectors. In any other market, these numbers would represent a bonkers level of progress in a very short time. But bonkers seems to be the new normal these last few years. More to the point, the Fed data indicated disinflation in about a quarter of the key components of the disinflation index, near term disinflation in another quater, and present but waning inflation in the rest. Still, they continue to urge caution as they see inflation being very hot, but nothing like it was last summer.

Improving Trends.

While the market recovery from the pandemic crisis continues to progress, it does so at a much slower rate than we would all like. The January effect has abated somewhat in February, but long-term indicators are still trending in the correct directions. For those of us managing portfolios over the past few years, this is a welcome relief. It’s also an indication we could be heading back to a more metered economic experience instead of the erratic pandemic slog.

The Road Ahead.

Certainly we are more heavily overweighted in specific sectors poised to recover more quickly. With the slowing of the federal funds rate increases, we might even see an entrance point into the bond market. But jumping the gun can be an expensive mistake. As if on cue, economic journalists have been reporting early entrances into the bond market by the do-it-yourself crowd.

Yet the problem with bonds that respond well to a stable and even declining interest rates is that they are also very susceptible to high inflation. So while they may offer some short term gains, the rate declines must happen very quickly to offset the erosion of purchasing power inherent in low yielding investments. In other words, no major entry into bonds for us yet.

Post Timing.

As you know, I typically prefer to post these updates just a few days before the end of the month. But with the earnings reports coming out in early February, as well as the Fed decision and meeting minutes, it seemed pertinent to hold off until now. After yesterday’s CPI release confirmed the Fed’s analysis, I thought it finally time to share the good news.

Happy Valentines Day!