If 2022 was the year of unprecedented Fed rate hikes and 2023 was the year of the “pause,” it seems likely that this year will be when the Fed pivots towards lowering rates. That’s what markets are anticipating. This means that investors will continue hanging on every word from the Fed until it’s clear the easing cycle is underway. We, like most, have been pleasantly surprised by the economy’s resilience in the face of 550 basis points of tightening. The question for stocks is whether this strength can continue if Chairman Powell follows a “higher for longer” strategy. We think it can, and we think he will.

Some observers are forecasting a cut in March, but we think June seems more likely. The worst mistake at this point in the cycle is to cut too early and then need to reverse course again and hike again. That said, Fed Chair Powell has made it clear that the easing cycle will start before inflation reaches the targeted 2% level. On that front, we’re close. Last week, CPI and PPI inflation measures increased 3.4% and 1.0% year-over-year, respectively. PPI Goods prices fell 0.4% in December and PPI Services were unchanged.

As the Fed steps back and rates find their “normal” levels, investors can now focus nervous energy on the presidential election in November. A lot will happen between now and then, and we’re not making any predictions. Our focus as always is on individual operating companies and how they might perform over the course of one or more business cycles, which often encompass multiple national election cycles. That means managing businesses through changing regulatory and macroeconomic climates. Elections are important, but there are a lot of factors that impact a company’s performance (positively and negatively) more so than who occupies the Oval Office. Without knowing who will win or what his or her specific policies might mean for individual companies, it is very difficult to make profitable tactical moves anticipating any outcome. Quality companies run by good managers will adapt, execute and make money for investors regardless of election results.

Disclosures 

Past performance is no guarantee of future results.  Investing involves risk, including possible loss of principal.  Diversification may not protect against market risk or loss of principal.  The opinions expressed above should be construed as neither investment advice nor a solicitation to buy or sell securities.  Actual investor results may vary. 

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