February, 2023
Rally Continues
Fresh earnings reports fueled further gains, with positive earnings surprises from several big-name technology companies that benefited the larger universe of Nasdaq-listed high-growth companies. Disappointing earnings from three mega-cap tech companies and a strong employment report triggered a Friday pull-back, paring the week’s gains.
Overall, U.S. stocks rose on the week, shaking off disappointing earnings, while Treasury yields reversed their drop after the Fed meeting. The U.S. jobs data this week brought back expectations the Fed was set to raise rates further in coming months. We think the key for the market outlook is whether inflation is on track to fall back to 2% targets and whether there will be a recession. Jobs data suggest the Fed has more work to do, even as the market still prices in rate cuts starting later in 2023.
We’re watching China inflation data for the first signs of effects from the economy’s restart after Covid lockdowns. Low inflation has allowed policymakers in China to keep policy supportive – but the rapid restart may prompt a change. China’s total social financing will be closely watched to see how current policy is translating into credit flowing into the economy.
Another Rate Hike
The Federal Reserve raised interest rates by 0.25%, signaling to the financial markets that it would likely hike rates by another 25 basis points at its next meeting in late March. Fed officials said the slowdown in rate hikes might provide time to assess the impact of the accumulated rate hikes. The Fed retained language in its post-meeting statement that future rate hike plans were unchanged to discourage investors’ hopes of an imminent pause in the rate-hike cycle.1
Last year, major central banks took a “whatever it takes” stance on inflation. We saw this as phase one of their policy response in a new regime. We thought they’d one day pause their hikes and shift to more nuanced messaging when economic damage became clearer, then live with some inflation – phase two. Last week’s mixed messages imply they’re stumbling into phase two sooner and before the damage is fully clear – but we’re not there yet. Inflation is cooling, but it’s not on track to return to target. Some supply disruptions that fed inflation are resolving, and falling goods and energy prices are lowering headline inflation. The outlook for labor markets and wages is key now.
Headline inflation, including food and energy, has been falling as consumer spending returns to services from goods. Core services inflation will drive overall inflation as spending normalizes, with the labor market central to how phase two plays out, in our view. Central banks seem to think wage growth can fall with headline inflation as workers dial down demands for pay raises to keep up with prices. The Bank of England (BOE) did so explicitly in forecasts last week, implying a deep recession isn’t needed to get inflation to target. Recent job data has been sending inconsistent signals. Notably, Friday’s data showed a still-tight labor market that could keep wage pressures high, notwithstanding recent softer data from ECI and payroll firm ADP. We think wage growth could be more persistent: It reflects a tight job market, difficulty hiring and low unemployment.
Signs of the Phase Ahead
Signs the Fed is stumbling into phase two: Chair Jerome Powell made inconsistent statements after the Fed hiked 0.25% last week. Powell made clear in his scripted remarks that rates will rise, the Fed isn’t eyeing rate cuts and its job to fight inflation isn’t done. He also stressed that services inflation – the Fed’s main focus – has not shown signs of falling. Yet his unscripted responses sent mixed messages. Powell failed to push back against easing financial conditions that work against the Fed’s efforts to bring down inflation. He also seemed to imply the Fed’s December economic forecasts were stale. While perhaps unintentional, this disconnect suggests the Fed may be nearing a pause, making communication challenges even trickier.
Other major central banks are facing the same communication challenges. European Central Bank President Christine Lagarde seemed to back down from previous whatever-it-takes language by not repeating that a shallow recession is “not enough” to hit the ECB’s inflation goals. She said the risk of ultra-high inflation had receded and lower headline inflation may lessen wage pressures in nearing annual pay negotiations. The BOE upped its 2023 GDP forecast and lowered its inflation forecast. The ECB and BOE raised rates by 0.5% last week, with the ECB set to do so again in March. The Fed, ECB and BOE pausing slightly sooner would reinforce our view they will face milder recessions this year and live with inflation that’s fallen a lot but is likely to settle above their targets. That means central banks are unlikely to cut rates as markets increasingly expect.3
Returns Following the Last Interest Rate Hike
Historically speaking, as you'll see in the chart below, the market returns after the last Fed rate hike have been positive. All eyes will continue to monitor their moves and the impact their policies have on the market.
The Debt Ceiling - Explained
Given that the debt ceiling is in the headlines again, we thought it might be helpful to offer some education and perspective on the subject.
Read below for more on what the debt ceiling is, learn a brief history of where it came from, why it is a 'crisis' that tends to repeat itself, and what we might do about it.
What is the Debt Ceiling?
According to the Department of the Treasury,
The debt limit is the total amount of money that the United States government is authorized to borrow to meet its existing legal obligations, including Social Security and Medicare benefits, military salaries, interest on the national debt, tax refunds, and other payments."4
The definition is straightforward enough, but as we all have seen, the execution around this limit is anything but simple.
A Brief History of Government Debt and the Debt Ceiling
Since our country's infancy, the U.S. has maintained some level of debt, but the structure and rules have changed over the years. From the early days through WWI, Congress had strict control over federal borrowing. Beyond authorizing all debt issued, they also defined the terms and instruments to be used by the Treasury.
This changed with the introduction of the debt ceiling in 1917 as it provided the Treasury with much more latitude in purpose, terms, and the instruments to be used.
The debt ceiling worked quite well in terms of fiscal restraint until 1974 when Congress passed the Congressional Budget and Impoundment Control Act, which created the congressional budget process. The intent of this act was to give Congress tools to restrict spending by the executive branch, but it's this budgetary process that introduced the annual crisis that is the debt ceiling.
The Perpetual Debt Ceiling Crisis
Here's how the debt ceiling works in practice: Except for during times of emergency (e.g., COVID), there is an existing debt ceiling in place at all times. Congress obviously knows the current limit since they're in charge of setting this limit.
But then Congress will pass a budget with a significant deficit (where spending exceeds revenues). Not surprisingly, this budget will inevitably cause the debt to balloon, thereby approaching the existing debt ceiling limitation.
When this happens, and we approach the point of defaulting on our debt (that's what this crisis is all about), politicians will then express a need for fiscal restraint only to succumb to the obvious raising of the debt ceiling once again. Then the cycle begins anew.
In other words, the debt ceiling is a self-imposed and self-perpetuating crisis that has occurred in some form 78 times since just 1960 alone. It's not fun, but politics rarely is.
"How Much Vitamin G Do you Get "?
What's the secret to live to a healthy 100? No one knows for certain, but who better to learn from, than those who do it?
There are a few places in the world, called "Blue Zones", which are geographical areas where people are known to have low rates of chronic disease and live longer than anywhere else.5
The term was first used by researcher Dan Buettner, who was studying places containing extremely high rates of nonagenarians and centenarians, which are people who live over 90 and 100, respectively.
Some might be quick to jump to genetics as an explanation for this phenomenon, but interestingly, research suggests genetics probably only account for 20-30% of longevity.5
That's good news, for all of us, because that means we have a lot more control over our futures than we perhaps give ourselves credit for.
Read on to learn the seven questions author and TedX Speaker Clay DeStefano asks as a quick personal checklist for your health status, aimed to help you live a longer, and healthier life in a "Blue Zone" of your own making.
1. What are your work and home environments like?
In his Ted Talk, DeStefano talks about how dark, cluttered, dusty, and moldy spaces can lead to chronic health conditions that impact your longevity. Of course, not everything about your environment is under your control, but being intentional about caring for the spaces you inhabit and seeking exposure to natural light can only help.
2. How much Vitamin G do you get?
It's not your fault if you haven't heard of 'Vitamin G'. This is DeStefano's shorthand for getting outside and into green spaces. Being present in nature is good for our hearts and souls, and many of the "Blue Zones" around the world studied by Buettner are societies that are centered around gardening, farming, and physical, outdoor jobs that keep you moving.5
3. How much do you move in a day?
Modern technology and sedentary work environments are hard to overcome, but the case for incorporating physical activity in your daily routine is overwhelming. Take, for example, a study of men in the Blue Zone of Sardenia, Italy. It was found that living on steeper slopes in the mountains and walking longer distances to work was associated with longer lives. In another study of over 13,000 men, the distance they regularly walked and number of stairs the climbed each day served as a similar predictor of how long they would live.5 Most people in blue zones don't necessarily go out of their way to exercise, but it is just built into their routine. What can you do to add a little but more movement in your days? Park the car in the back of the lot? Take the stairs?
4. How is your attitude?
DeStefano says, "A negative attitude often begets a negative outcome. Positivity begets positive outcomes." Beyond just thinking postively, most people in Blue Zones tend to have a life purpose, known as "ikigai" in Okinawa, Japan, or "plan de vida" in the Nicoya Peninsula or Costa Rica.5 Possibly through improved psychological well-being, this approach to life with a sense of purpose is associated with a reduced risk of death.5
5. How are you sleeping?
Most of us have heard that consistently getting at least 7 hours of sleep in a cool, dark and quiet environment is good for our health. Oftentimes it is recommended to go to sleep and wake up on a routine as well. Interestingly, people in Blue Zones tend not to go to sleep, wake up, or go to work at set hours. They just sleep as much as their body tells them to.5 While that is a luxury many of us don't have, another Blue Zone sleeping habit is a 30-minute daytime nap. Taking these short naps may reduce the risk of heart disease and death5, and perhaps could be worked into your routine.
6. Are you stressing over your stress?
DeStefano emphasizes the importance of having healthy mechanisms for handling stress. Creative outlets such as painting, or passive movements like dance, yoga. For example, Okinawa is home to the world's oldest women, who consistently practice tai chi as a meditative form of exercise.5
7. How much do you socialize?
Humans are social creatures who benefit from face-to-face interactions. In Blue Zones, grandparents often live with their families, and studies have shown that grandparents who look after their grandchildren have a lower risk of death. Your greater social network, known as your "moai" in Okinawa, can also impact your health. Surrounding yourself with people who make the lifestyle choices you would like to make may help you follow suit. Conversely, if your friends are obese, you have a greater risk of being obese, possibly through social acceptance.5
Ultimately, as DeStefano put it, "For most people, genetics loads the gun, and lifestyle pulls the trigger." What we learn from our gracefully aging friends in the Blue Zones of the world is that the lifestyle choices we make today will have a profound impact on our long-term health and wellness. We challenge you to choose even just one of these seven questions to make some small changes in your life that will hopefully result in even more healthy tomorrows for you and your family.