Key takeaways from the Fed’s December meeting minutes

On the latest edition of Market Week in Review, Chief Investment Strategist Erik Ristuben and Sophie Antal-Gilbert, Head of AIS Portfolio & Business Consulting, reviewed market performance from the final weeks of 2022 and discussed key takeaways from the U.S. Federal Reserve (Fed)’s December meeting minutes.

2022 in review: A look back at an awful year for markets

Antal-Gilbert and Ristuben kicked off the inaugural episode of 2023 with a look at how markets fared during the closing weeks of 2022. In general, equity markets were effectively flat during this time period, with little in the way of volatility, Ristuben said, with bond yields and credit spreads also remaining pretty stable in the back half of December.

The relative dullness at the end of 2022 was a far cry from how the rest of the year played out, he noted, characterizing 2022 as a pretty awful year for capital markets. In the U.S., the benchmark S&P 500® Index finished the year down by approximately 19.5%, Ristuben said, with the Russell 2000® Index of small cap stocks off by about 20.5%. Interestingly enough, several key non-U.S. equity indexes fared better than their American counterparts last year, he observed, despite a strong year for the U.S. dollar.

“For U.S. investors, years with a strong dollar usually mean weaker non-U.S. equity returns—but that wasn’t the case in 2022,” Ristuben stated. As proof, he pointed to both the MSCI EAFE Index, which was down approximately 14.4% last year, and the MSCI World ex-USA Index, which declined by roughly 13.8% during the same time period. Overall, the better stock-market performance outside the U.S. was probably a recognition of the expensive valuation of the U.S. market coming into 2022, he said. “It’s important to remember that at the beginning of last year, many parts of the U.S. market were priced close to perfection,” Ristuben remarked.

He noted that yields on U.S. government debt also rose a bit during December, with the yield on the 10-year Treasury note topping 3.8% near the end of the month. “I think this was indicative of the market realizing—particularly in the wake of several mid-December rate hikes by global central banks—that the inflation dragon isn’t dead yet,” Ristuben stated, adding that the problem of high inflation appears far from over. 

Fed meeting minutes show rates likely to stay high for some time

Antal-Gilbert and Ristuben shifted the conversation to recent headlines from Washington, D.C., including the saga over the selection of a speaker for the U.S. House of Representatives and the Jan. 4 release of the Fed’s December meeting minutes.

On the speaker saga, Ristuben said that because markets are already anticipating gridlock in Congress this year due to a divided government, the Republican Party’s difficulty in selecting a House speaker is probably a non-event from a market perspective. “I don’t think it’s worth it for investors to spend a lot of time on the House speaker drama. If anything, the impasse is only reinforcing the market’s expectations for gridlock this year,” he said.

The release of the Fed’s meeting minutes from mid-December is probably a little more impactful for markets, Ristuben said, but ultimately the minutes feed into investor expectations for higher rates. “Markets now see the federal funds rate getting north of 5%, which I think is probably a reasonable expectation,” he said, noting that the current rate sits in a range of 4.25%-4.5% after the Fed’s latest rate increase

The Fed meeting minutes also reinforced investor concerns over the strength of the overheated U.S. labor market, Ristuben said, noting that 263,000 jobs were added during November and consensus expectations are for 200,000 new job additions in December. “Markets are in this situation where good news for Main Street is bad news for Wall Street. An addition of 200,000 new jobs would be fantastic news on a human level, but not on a macroeconomic level. This is because the biggest form of inflation the Fed is concerned about right now is wage inflation—and 200,000 additional jobs isn’t going to relieve any pressure on wages,” he explained. Because of this, if U.S. job gains during December come in around 200,000 or higher, markets will probably react negatively, Ristuben said.

“Ultimately, as the most recent minutes show, the Fed’s main concern remains taming inflation—and that may mean it has to become even more restrictive in its policies in order for the jobs market to weaken,” he concluded.

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