We could be in a truly unique moment. If this is true, we should be very excited about the outlook for stocks this year. But why?
Inflation hit the highest level in over 40 years in 2022. But in the second half of the year it almost got back down to the Federal Reserve’s 2% inflation target. Of course, you didn’t hear about this development because the government and media focus almost entirely on 12-month periods. Over the last 12 months, the consumer price index (CPI) increased 7.1%. But that’s because inflation averaged an incredible 10.6% in the first 6 months of the year and believe it or not, it just increased by 2.5% over the second half of the year 2022.
Nearly 3 years ago, recognized now as a horrendous overreaction to the spread of COVID, governments world-wide locked down people and shut down most businesses. Manufacturing, transportation and retailing came to a halt. The supply chains got damaged. But human economic needs continued. So, it is logic that too much money chasing a limited amount of goods available will lead to the classic scenario: Inflation! On top of this all, governments around the world put oil into the fire by supplying plenty of cash by printing mainly unnecessary money.
But the lockdowns are over an the supply chain (with a few exceptions) is no longer experiencing bottlenecks. Higher rates makes money more expensive. Both are disinflationary. Additionally, the new Congress with Republican majority will control Biden’s nonstop spending. This should be in general all good news for 2023.
But there is one big risk. Will the Federal Reserve take interest rates so high that it will push the U.S. into a recession? That’s a real threat but possibility. Fed Chairman Jerome Powell made a fool out of himself by not seeing what everybody should have seen and declared publicly that inflation was merely “transitory”. But is definitely wasn’t. Afraid of looking too dovish, he is now playing tough. But why is he not looking at the second have inflation trend?
Today’s inflation was caused almost entirely by too much government intervention in the economy. Hopefully this intervention and overreaction ended. e overreach But the risk remains that governments repeat stupid decisions. If not, the outlook could be excellent.
If the Fed ends its tightening this quarter and governments don’t play stupid, then this environment could set the stage for a serious rebound in stocks.
Sven Franssen