Hope you are all doing well. Each of the major U.S. stock indexes fell around 3%, sustaining their biggest weekly declines of 2023. After starting the year on a mostly positive note, the S&P 500 recorded its third negative week in a row, and the Dow slipped into negative territory year to date. On Saturday famed 92 year old investor Warren Buffett sent his annual letter to shareholders. In the letter Buffett shared some thoughts from his 99 year old business partner Charlie Munger. I have broken down this week’s updates using some of Charlie’s wisdom.
When analyzing conflicting views on a strategy my experience has been that the side who is playing the long game is usually right. Markets and the U.S. Federal Reserve clearly have different views on where rates should be. The Fed is squarely focused on fighting inflation and is not concerned about some of the short term implications of their decisions. The market has grown inpatient with the Fed’s rate hikes and keeps underestimating their resolve. As more data emerges the markets are continually having to readjust their view, while the Fed has stayed pretty consistent. This week we learned the Fed’s preferred gauge for tracking inflation rose 0.6% from December to January. That is the largest month-to-month increase since last June. The bigger-than-expected rise in the Personal Consumption Expenditures Price Index weighed on stocks Friday. Investors realized markets may have declared victory against inflation too soon. The Fed has refused to let up knowing the job was not done. They will continue lifting interest rates as they realize the importance of price stability over the long run.
Walmart and Home Depot stoked those fears by warning of the potential demise of rampant consumer spending. Executives from both companies gave cautious guidance for the year ahead. The companies, which have benefited greatly from the strong consumer, warned that shoppers were spending less on nonessential goods. The cautious sales outlooks at the two major U.S. retailers helped trigger a broad market sell-off on Tuesday. The S&P 500, the NASDAQ, and the Dow all fell more than 2% for the day; government bond prices also declined, sending yields higher.
The volatility experienced last week is unlikely to disappear quickly as markets continue to be Fed driven. The economy will cool and perhaps is not as hot as originally thought. This week we got a revision to last quarter’s GDP. The U.S. economy grew at a slightly slower pace in the fourth quarter of 2022 than originally estimated, according to a revised government release on Thursday. GDP expanded at an annualized rate of 2.7% in the latest quarter, down from an initial 2.9% estimate released a month earlier. The downward revision was attributed in part to slower consumer spending than initial data had shown. We have some headwinds over the next couple of months between the Fed, a slowing economy and the debt ceiling. Bull markets usually emerge when things look most bleak. I expect a new bull market to emerge later this year. The best thing to do is stay invested. If possible, up your contributions to your retirement plans while the market remains in bear territory as you are buying good investments at reduced prices with every contribution.
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