The Markets – December 20, 2022

Bad news is bad news, once again.

For months, investors have cheered bad economic news. When the United States economy showed signs of weakness, stock markets often reflected investor enthusiasm. The thinking was that bad economic news would persuade the Federal Reserve to slow the pace of rate hikes. Inflation would slide lower, and recession would be avoided.

Last week, there was a shift in attitude.

On Wednesday, the Federal Reserve raised the federal funds rate by half a percent, as expected. Over the course of this year, the fed funds rate has risen from near zero to 4.33 percent. That’s an enormous increase designed to drop inflation by slowing economic growth – and the Fed expects growth to slow.

The dot plot is a chart that reflects the expectations of each member of the Fed’s decision-making committee. It showed that Fed officials expect U.S. economic growth to slow next year. The forecasts indicated gross domestic product (GDP), which is the value of all goods and services produced in the U.S., could grow very slowly or even contract next year (it could contract -0.5 percent or grow to 1.0 percent). Fed officials also anticipated the unemployment rate could rise from a relatively low 3.7 percent to 4.6 percent.

The day after the Fed’s statement, the Commerce Department reported that retail sales declined more than expected in November. That suggests economic growth may be slowing.

The stock market didn’t surge on the bad economic news. It retreated. Vildana Hajric and Lu Wang of Bloomberg reported:

“For the first time in a long time, news that was bad for the economy was bad for the stock market as well, more proof that recession fear has replaced inflation angst as that market’s biggest bugaboo… Rather than rise on speculation that weak data would curb Federal Reserve tightening, the S&P 500 dropped 2.5% on Thursday, while the Nasdaq 100 lost 3.4%. Small-cap stocks lost more than 2.5% and the VIX volatility gauge shot back above 22. The yield on 10-year Treasuries hovered around 3.45%, down from a peak of 3.63% earlier this week.”

Last week, major U.S. stock indices finished lower, and the Treasury yield curve remained inverted.

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods. Sources: Yahoo! Finance; MarketWatch; djindexes.com; U.S. Treasury; London Bullion Market Association. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

WHAT DO YOU KNOW ABOUT MONEY AND FINANCES? When Annamaria Lusardi was a graduate student, she noticed something remarkable. People who earned similar amounts during their working years didn’t arrive at retirement with the same amount of wealth. The reason had a lot to do with financial decision-making that resulted from low financial literacy.

A 2022 report from the Global Financial Literacy Excellence Center (GFLEC) found that, on average, American adults answered about 50 percent of financial literacy questions correctly. This quiz has a lot fewer questions than the GFLEC survey, but they may be quite challenging.

1. You have $1,000 in an account. It earns 4 percent interest each year, and you keep the interest in the account. After two years, will you have:
   1. $1,080
   2. More than $1,080
   3. Less than $1,080
   4. I don’t know

2. Your account earns 4 percent interest per year and inflation is 5 percent per year. After one year, the money in the account will buy:
   1. Exactly what it buys today
   2. More than it buys today
   3. Less than it buys today
   4. I don’t know

3. The monthly payments on a variable rate mortgage are not fixed. What happens to those payments when rates increase?
   1. Payments rise
   2. Payments fall
   3. Payments stay the same
   4. I don’t know

4. When interest rates move higher, bond prices move:
   1. Higher
   2. Lower
   3. Stay the same
   4. I don’t know

5. You owe $1,000 on your credit card. The card company charges an interest rate of 25 percent compounded annually. If you make no payments on this credit card, how many years will it take before you owe twice as much?
   1. Two years
   2. Three to four years
   3. Four to five years
   4. Six or more years.

If you have any questions about the answers, let us know.

Weekly Focus – Think About It

“I cannot teach anybody anything. I can only make them think.”

—Socrates, philosopher

Answers: 1) b; 2) c; 3) a; 4) b; 5) c

Best regards,

Daniel J. Murphy, CFP®
Murphy Wealth Management Group
60 Merritt Blvd., Suite 106
Fishkill, NY 12524

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