Much of this year’s market volatility is attributed to uncertain federal reserve policies, especially with respect to the terminal rate, which represents the forecasted level at which hikes will stop. The terminal rate changes consistently in response to new information.
The Federal Reserve is committed to lowering inflation before it can pause rate hikes. They have been raising interest rates by .75 percentage points and did so for the 6th consecutive time in November. Federal Reserve Chairman Jerome Powell recently stated that these increases will continue, but at a lower frequency: “Thus, it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down,” he added. “The time for moderating the pace of rate increases may come as soon as the December meeting.”
After a chaotic couple of years for the housing market, 2022 brought a decline in existing home sales, which has begun to bring average home sale prices down with it. This is connected to the high-interest rates discussed earlier, as we see mortgage rates north of 7%. Though there is no way to be completely certain, it seems as if these rates will continue to inch up over the coming months until inflation has returned to more comfortable rates. Though this is not good news for first-time homebuyers, hopefully, it will indicate a gradual return to normalcy and give the housing market a chance to balance out.
Even though the housing sector has slowed down, overall economic growth seems generally on track as spending activity has remained resilient. The third-quarter GDP estimates showed growth at a rate of 2.6%, slightly better than predicted earlier. Consumer spending indicates a stabilization in demand and goes along with healthy rates of employment.
Hopefully, the improvements we have observed in fundamental sectors indicate long-term growth. In the meantime, several risks remain abroad, such as the slowdown in China, the crisis in Ukraine, and the tightening of global monetary policy. How these may impact U.S. markets and our economy remains to be seen, but we should be prepared regardless for continued volatility as we begin 2023.
Looking Towards the Future
Throughout history, stocks fall as inflation reaches a peak, and rebound strongly once inflation starts to come down. Volatility is the price of admission for long-term investment games, which rewards the patient investor.
Here at Blakely Financial, we constantly monitor the economy, the markets, and your portfolios to assess how our chosen investments are performing and decide if changes are necessary or prudent. Overall, we have observed multiple Indications of reduced inflationary pressure in the months ahead, which could be good for stocks. We remain confident in our medium and long-term strategies, regardless of what the immediate future may bring.
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