A Strong Economy Means More Rate Hikes
In any other time, investors would be excited to hear the recent economic data. The job market is strong and factory orders are up. Stock prices should be climbing on this news. Especially for an economy on the brink of recession. But that isn’t the case. Instead, stocks are sliding on fears of what the Fed will do next.
Investors are scared that signs of a strong economy will cause the Federal Reserve to maintain its aggressive interest rate hikes. The Dow slid more than 400 points on those fears. Bank of America warned their investors to brace for a volatile market in January. Their analysts see the Fed tightening the economy right into a recession.
The Institute of Supply Management (ISM) Non-Manufacturing Index is an economic index. It is based on surveys of more than 400 non-manufacturing firms’ purchasing and supply executives. The ISM is a barometer on the overall economy. The index shows the economic trends in both the manufacturing and service sectors. The latest index came in higher than expected. It showed that the economy is expanding.
Investors usually expect the stock market to rise when the index is increasing. This is because corporate profits should also increase. But this isn’t the case in today’s high inflation economy.
In more examples of good news equals bad news, the unemployment rate remains unchanged. 236,000 jobs were added in November, far surpassing economist predictions. Contributing to Fed fears, the non-farm payroll report showed that average hourly earnings rose above expectations. There was the largest hourly wage increase this year. In addition, factory orders were up according to the Commerce Department.
The Federal Reserve’s Response
Low unemployment, wage growth and increased factory demand will drive the Fed to tighten the economy more. The Fed wants to slow growth to drive down inflation. Inflation has been hovering near 40-year highs for almost a year. It persists despite one of the most aggressive tightening cycles in decades.
The Fed needs for unemployment to rise and consumer demand to fall before they pivot from their rate hikes. Low unemployment and high wages accompany higher inflation. Companies raise prices to account for higher costs. In an odd twist, Fed Chair Powell tried to justify his desire for more unemployment by saying inflation is eating away worker’s wages. Which makes sense, as long you’re not the person losing their job.1
Record high interest rate hikes are pulling down stocks and dragging down corporate earnings. The rate hikes are also pushing the economy into a recession. As a result, retirement funds are losing value at a rapid clip.
All this seemingly positive data should throw cold water on investors hoping for a Fed pivot. Currently, markets expect the next rate increase to be .5 %. The previous four hikes have been for .75%. But there is nothing discouraging another steep rate hike. Powell said the point where the Fed stops raising “will need to somewhat higher.”2
Morgan Stanley’s chief U.S. equity strategist said investors should consider taking profits now since stocks aren’t going to be going any higher. For stocks to climb, “rates would need to fall.” he said in a note to clients. “We recommend taking profits before the Bear returns in earnest.”3 Now is the time to move money from securities to safe haven assets. Our Gold IRA can preserve your wealth and help you prevent further losses to your retirement funds. Contact us today to learn how.