The disconnect reviewed last quarter between the stock market valuations and the economy remains. As we shift into 2023 and a still looming, possible recession, it is important to understand this disconnect.
We finished 2022 with an overall unemployment rate of 3.5%, the same rate we had in February 2020, right before the fallout of COVID. The year also ended with the second-highest number of jobs added, only behind 2021, going back to the 1940s.
A deeper look at the “job growth” shows much of it was filling jobs lost during the COVID uncertainty. Regardless, having unemployment back near all-time lows should be a positive sign for the economy. However, much of the economic data is still being viewed through a lens clouded by inflation concerns.
Looking back to the start of the year, interest rates were still essentially zero while inflation continued to surge. The Fed was hoping for transitory inflation that would be cured as supply chains went back online. Supply chains were temporarily part of the problem, but the government injecting 5 trillion dollars into the economy was the root cause and much harder to fix.
Inflation soared like we have not seen in this country since the 70s and 80s, therefore; the Federal Reserve completely switched its tone. Drilling down, the Federal Reserve has a dual mandate from Congress: maintain stable prices and full employment.
How did they do?
They completely whiffed on the first target as they waited far too long to raise rates. Now, they are targeting the second mandate of full employment, and this is where the disconnect lies. Multiple Fed officials continue to suggest that they are targeting a higher unemployment rate as a way to slow down inflation.
Even though much of the data shows inflation on its way down, the Fed has indicated its plans to continue to raise rates. This is the center of the disconnect between the stock market and the economy. As robust economic data continues to emerge, the Fed believes they have a longer runway. Or maybe they are using their rhetoric to inject negative sentiment into the economy to continue slowing things down. Only time will tell.
However, as much as the disconnect was a negative for the stock market in 2022 (the 7th worst year for the market going back to the 20s, while real GDP was positive), it certainly could be positive for 2023 as rate hikes bring the desired slowing of economic growth. Only time will tell where things will go. We’ll be sure to keep you updated as the year progresses.
As always, please reach out with any questions! These are our thoughts, have a great Thursday.
~ Austin Smith, CFP®, CFA®
*Data was sourced from the Walls Street Journal, First Trust’s Economic Blog, and the US Dept. of Labor Statistics