The Fed Hikes Rates 4 Times In 2023 – Bond Market Overview

The Federal Reserve raised rates eleven times between 2023 and 2022, increasing the Fed Funds rate from 0% at the beginning of 2022 to 5.5% at the end of 2023. Expectations are that the Fed will begin easing rates in 2024, reversing its tightening monetary policy. Lower consumer and mortgage rates are expected to materialize as the Fed eases. Fed influenced rate reductions among other central banks globally is creating a lower rate scenario in 2024. The European Central Bank (ECB) as well as the central banks of Canada and England signaled a continued easing of rate policy in 2024. A unique dynamic started to occur in the 4th quarter of 2023, with Treasury yields and commodity prices falling in tandem. Some economists perceive the dynamic as deflationary in nature, adding to an eventual lower rate environment. Deteriorating inflation concerns have also led the Fed to project possible lower rates as the year progresses. The yield on the 10 year Treasury bond ended 2023 at 3.8%, down from 4.95% in October.  Sources: Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/FEDFUNDS

Stocks Finish 2023 On A Positive Note – Global Equity Review

Major global equity indices experienced a reversal in performance towards the end of 2023 relative to earlier in the year. Domestic indices including the Dow Jones Industrial Index and the S&P 500 Index, finished the year positively, along with international indices including the Japanese Nikkei 225 and the German DAX. Seven stocks accounted for roughly 33% of the returns for the S&P 500 Index in 2023. Such a disparity can distort the actual representation of the index, with only 7 stocks representing such a large portion of returns relative to the other 493 stocks within the index. Information technology stocks contributed the most to the performance of the S&P 500 Index, accounting for half of the indices’s return in 2023. Seventy-one percent of the S&P 500 Index rose less than the index itself in 2023, a disconnect from the top seven. It was the first time since 2012 that the S&P 500 Index failed to close at a record high at least once during the year. The index closed at its current record high in January 2022. Sources: S&P, Bloomberg, Reuters, https://fred.stlouisfed.org/series/SP500

How Deflation Develops and What It Does

Inflation Overview:  A gradual devaluation or decline in overall asset prices is known as deflation, which leads to lower prices on most goods and services. This eventually creates an unfavorable environment for companies to raise prices and maintain already elevated profit margins. Ironically, what has led to this environment are the lingering effects of inflation.

As the pandemic diminished and consumers spent more, companies raised prices as demand increased, eventually bringing about inflation. Now, as demand dissipates and consumers spend less, prices head lower. Economists suggest that long-term yields can directly portray deflation. As the 10-year Treasury bond yield has fallen since its peak in October, nominal GDP along with inflation has slowly fallen. Real wages have also contracted, leading consumers to refuse to pay higher prices but demand more lower-priced goods. Retail stores have resorted to discounting in order to increase sales and reduce unwanted inventories.   Commodities across the globe are also reflecting deflationary characteristics as prices have pulled back from the highs of 2021 and 2022, including lumber, natural gas, aluminum, copper, and wheat. The International Energy Association (IEA), for the first time, predicted that global demand for oil will reach a peak this decade, indicative of possibly lower oil and gasoline prices in the future. Fed Chair Jerome Powell mentioned that elevated long-term bond yields lessen the pressure for tighter monetary policy, meaning that the Fed may not need to raise rates further, thus allowing rising bond yields to slow economic activity.  Sources: Treasury Dept., Federal Reserve, IEA

Global Tax Rates on the Rise – Global Tax Policy

Governments worldwide rely on tax revenue in order to fund government expenses and operations. Tax policies and initiatives vary from country to country depending on the economic prosperity and health of the country’s economy. Developed countries tend have more comprehensive and structured tax policies in place, relative to emerging market countries. The recent rise in interest rates worldwide has led to a higher cost of governments issuing debt, thus prompting governments to instead resort to raising taxes. France, Japan and South Korea are among countries with increasing tax revenue in lieu of issuing additional government debt. Certain developed economies are also seeing an increase in labor force participating rates, including France, Germany, Italy, and Japan. Increasing participating rates tend to increase tax revenues as more workers add to the tax revenue base.

Sources: OECD; Tax On Personal Income Publication

Market Performance During Presidential Election Years – Political Dynamics

Election year markets are always a quandary, as candidates propose economic and fiscal plans in order to boost the nation’s economy. Interestingly enough, political parties have had nearly no bearing on market performance during election years as far back as 1928. Federal Reserve policy during an election year can be construed as politically influenced, even though the Fed’s stated disconnect from the administration and political sway is clearly defined. The Fed has risen interest rates 60% of election years since 1928, with varying political parties in office. The average return for the S&P 500 Index since 1928 during an election year has been approximately 11.25%. A multitude of factors affect presidential elections, including fiscal and tax policies, foreign policy initiatives, social programs, and economic stimulus objectives. Congressional control of the House and Senate are also a factor during elections, as some states strive to either synergize or disconnect from Federal initiatives.

Sources: Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/SP500