December 17, 2022 | Inflation, The Fed Report, Job Market & Sole proprietor or S-Corp pt. 2

Inflation

As expected, inflation continued to decelerate in the month of November. I was thinking there was a small possibility we might see a reading for the headline number in the high 6% range, but the headline number ended up coming in at 7.1%. This was lower than the expectation of 7.3% and below October's reading of 7.8%. As a reminder the peak came in June with a reading of 9%. Some areas that stood out were eggs which were up 49.1% compared to last year, airfare was up 36%, energy was up 13.1% as electricity was up 13.7% and unleaded gasoline was up 9.8% and shelter was up 7.2%. One item that hasn't been discussed much is that the US has had one of the worst bird flus in history, which has impacted the price of eggs. As for energy I continue to believe next year the comparisons will be much more favorable, especially considering the energy index fell 1.2% compared to last month as gas prices fell 2%. Housing costs, which make up about 1/3 of the entire index, have shown signs of cooling and I believe they will be much more muted in 2023. Also, I wanted to point out that used car prices fell 3.3% compared to last year. Remember at the beginning of the year when used car prices were up 40% in the month of February compared to the prior year? I believe like used car prices many of these categories that are extremely elevated will normalize next year also helping to reduce inflation. My expectation is that for December we will see a reading that shows at 6 at the front of it and for next year inflation will be in the range of 4-6% for the year. I believe this will bode well for the right stocks in 2023.

 

The Fed Report

Markets did not like what Fed Chair Jerome Powell had to say after the Fed's meeting. The decision to increase rates 50 basis points or 0.5% was widely anticipated. It brings the target level to a range of 4.25% - 4.5%, which is the highest level in 15 years. What the market did not like was the terminal rate, or the point where the Fed expects to end rate hikes as it was higher than expected at 5.1%. I continue to believe this would be too high as the Fed should give the rate hikes and quantitative tightening (QT) more time to work through the economy. The Fed has been allowing a capped total of $95 B worth of bonds to roll off the balance sheet each month and since early June the balance sheet has declined $332 B to $8.63 T. I believe that inflation will naturally continue to decelerate next year and a reduction in the terminal rate could occur in the first part of the year. A softer tone from the Fed would be beneficial for the right stocks.

 

Job Market

I continue to watch the jobs market looking at both past information and future information because I believe a strong job market will keep a recession very mild and it may not even be noticeable. I continue to hear from people that they are seeing all these layoffs from tech companies, but I talk about how there are many other companies that are hiring in 2023. Based on a recent survey, a nationwide staffing firm, LaSalle Network, says about 84% of companies it works with are planning to hire in 2023. This is roughly 20% higher than those planned to hire a year ago. The CEO Tom Gimbel says he has seen a 50% increase from last year in demand for salespeople and this is a positive sign because when a firm increases staff in the sales department they believe they have room to grow. So don’t just look at the headlines of 10,000 employees being laid off at some big tech firm and think the entire job market is collapsing. Look at the overall economic job market.

 

Harrison – “Sole proprietor or S-Corp pt. 2”