Analysts said that sticky inflation and strong retail sales indicate that the Federal Reserve hasn’t been able to curb demand, so investors should prepare for tighter monetary policy and further market weakness.
Although the Federal Reserve has increased benchmark rates by 450 basis points since last year to slow the economy and bring inflation under control, January showed that demand is still very high.
Retail sales increased by 3% last month, exceeding expectations of a 1.9% rise. Additionally, producer prices increased 6% while consumer prices increased 6.4%, exceeding expectations.
The Fed is trying to cut demand, but it’s not working. A prime example is retail sales. The customer still exists, “Crossmark Global Investments‘ chief market strategist, Victoria Fernandez, stated in a CNBC interview.
Therefore, if you want to reduce demand to lower inflation, these encouraging numbers—which ordinarily would be cause for celebration—indicate that the Federal Reserve and other central banks will remain strong.
The data confirmed earlier indications that the economy is still heating up, which were already present in the January payroll report, which revealed a startling 517,000 job gains.
However, Fernandez believes the US economy’s resilience will help it avoid a major recession and experience a modest downturn. In terms of the stock market, she predicts a “pretty flat year” rather than a sell-off similar to 2022.
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Have a balanced perspective; she advised, “because I think the majority of the year is going to be choppy.”
Jerome Powell, the chairman of the Federal Reserve, has utterly expressed a desire to continue raising interest rates. However, the market has only recently begun to catch up after believing that the Fed plans to lower rates rather than raise them in 2023.
Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, said that it’s very clear that the liquidity in the market, consumer savings, and positivity about the job market continue to encourage consumption.
This presents a serious challenge for the Fed because reducing demand is one of the goals of central banks’ increases in interest rates in the fight against inflation. Furthermore, the economy’s consumer and services sectors are still experiencing high demand, despite forecasts to the contrary.”
In addition to including fixed-income investments in their portfolios, both strategists suggested that investors select stocks smartly. Shalett favoured a well-rounded investment strategy that included both growth and value stocks.
Shalett, however, has a less optimistic outlook for the state of the market than Fernandez does.
We have discussed the possibility of a boom-bust scenario, she added. We wouldn’t be surprised by a 15% to 20% decline from current levels, which would placed us just under the prior cycle.
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