The Fed has taken a hard line on inflation, which has stolen any chance of a Santa Rally. But the Fed's latest projections and rhetoric do not match up with recent economic data. It's as if the Fed doesn't want investors buying bargains, but rather stay "Home Alone" this Christmas.
The 1990 hit movie is the inspiration for the final musings of 2022. The movie was written by '80s film-making legend John Hughes, but directed by Chris Columbus. The film had an amazingly low budget of just $18 million, but grossed over $476 million. Of course, the movie has been quotes so often I dare say there are few who are not aware of the movies existence. But, here is some trivia that you may not know:
Joe Pesci deliberately avoided Macaulay Culkin on-set because he wanted Culkin to think he was mean and stay in-character.
Neither Pesci nor Daniel Stern thought the movie would be a success, so they intentionally gave over-the-top performances in jest, which actually worked toward the film's success.
The famous scene of Stern screaming when the tarantula was placed on his face was real. In fact, the poison from the tarantula was NOT extracted prior to the scene.
The great John Candy filmed all of his scenes in one-day. His dialogue was almost completely improvised and he took the Screen Actors Guild minimum wage for compensation as a favor to his friend John Hughes.
Here's what we're seeing this week....
You Guys Give Up, Or Are You Thirsty For More. This famous line from Kevin in the movie was completely improvised by Culkin during filming. It's the same attitude the Fed is using with investors.
As we pointed out last week, the Fed's adjustments to economic projections for 2023 point to a recession, which is deflationary in nature. Yet, the Fed also increased their inflation projection for 2023. These two actions do not equate, which is why we think investors should largely ignore the gesture. The Fed's favorite measure of inflation, Core PCE Prices, showed a drop this morning from 5.0% in October to 4.7% in November. The standard PCE Price Index has declined 4 of the last 5 months. The historical measure of inflation, PPI and CPI (which we largely prefer), shows declines over the last 5 consecutive months. The Fed is either ignoring this data, or they consider the decline in inflation as "transitory" as they considered the increase nearly two years ago.
Fuzzy Math - Uncertain Outcomes. One of my favorite scenes from "Home Alone" involves the discussion among siblings of Kevin and him being able to survive being home alone. One of Kevin's sisters asks his nemesis brother Buzz, "You're not at all worried that something might happen to Kevin?" Buzz in his most scholarly voice states, "No, for three reasons: A, I'm not that lucky. Two, we use smoke detectors, and D, we live on the most boring street in the whole United States of America."
I feel like the Fed's fuzzy math is as scholarly as how Buzz describes his reasoning. This leads us to what investors can possible expect in 2023. While we are not entirely certain of our expectations, we have to lean toward the beginning of 2023 being more of the same as the end of 2022. The Fed in control of markets for the time being. Whenever the Fed breathes, markets move one way or another. This could likely spell a range-bound market in the short-term.
To us, the real question is what does the consumer do in 2023? Is there a hangover from Christmas spending, causing consumers to hit the pause button due to still high inflation and the prospect of higher interest rates? So far, in 2022, the consumer has been resilient. Other than a breakout February and a disappointing August, Personal Spending has been rather consistent this year. Redbook Sales on a year-over-year basis are above average and trending above average in December during a year of high inflation and high interest rates.
Look What You Did You Little Jerk. This year has seen a lot of "blame game" strategies. In fact, our whole society is rife with this illness. One of the somewhat unanswered questions in "Home Alone" is when will Buzz get his come-upings? He torments Kevin to no end and doesn't seem to ever get a punishment (although, Kevin does destroy his room while at home all alone).
Buzz starts a fight with Kevin and Kevin responds by pushing Buzz into the kitchen table. After some mayhem, Kevin's uncle looks at Kevin and gives the famous line calling him a "little jerk." Likewise, instead of the Fed acknowledging their faulty logic of flooding the system full of money during COVID, letting inflation increase by more than 400% in 2021 before addressing it, and now raising rates too high for too long, it's the blame game. War in Ukraine, Supply Chain Disruptions, etc. are to blame, but not the Fed - the largest, most influential Central Bank in the world. We should be asking the Fed, "Look what you did?" The bright spot for 2023 is that back-to-back negative years for equities are not standard. Since 1928, the S&P 500 Index has been negative in 25 calendar years (27% of all years). Of those 25 negative years, only 8 (32%) has seen back-to-back negative years. So, perhaps 2023 may see a return to the positive column. For now, we expect more range-bound returns. Stay upbeat, but remain cautious.
Merry Christmas!
Disclosures
The information contained herein is for informational purposes only and is developed from sources believed to be providing accurate information. The opinions expressed are those of the author, are for general information, and should not be considered a solicitation for the purchase or sale of any security. The decision to review or consider the purchase or sell of any security should not be undertaken without consideration of your personal financial information, investment objectives and risk tolerance with your financial professional.
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