February saw stronger than expected CPI (Consumer Price Index) results, surprising the market. Headline CPI printed at 6.41% YOY. The median forecast was 6.20%. The Federal Reserve indicated that rate hikes are working to curb inflation, albeit at a slower pace than desired. An added 25 basis points of tightening (overnight rate increases) was priced into the market to bring the terminal rate to approximately 5.40% mid-summer. January’s peak rate mid-summer was priced at 5.15%

The inflation news in February painted a very different picture than January. On a total return basis, large cap growth stocks were the top performers as the Nasdaq 100 fell only .4%, Energy stocks were the clear underperformer, falling by over 7%. The technology sector was the only positive performer, registering gains of .4%. The graph below details the returns for each major sector.

As we talked about in our January newsletter, the Federal Reserve’s main job is to ensure prices paid by consumers are stable over time and everyone who wants to work in the U.S. can find employment. The main tool in the Fed’s arsenal to balance these two mandates is monetary policy. The graph below details the historical changes in these mandates. To meet its price stability objective, Federal Reserve policy makers target a 2% inflation rate. The trajectory is encouraging but you can see there is a way to go before their goal is achieved.

Source Bloomberg

It’s important to recognize each rate move has a lagging impact on the economy. We are now just seeing the effects of rate increases from the fall. The Federal Reserve weighs this during every meeting and it factors into their decision-making process.

As we mentioned in our previous newsletters, short-term volatility has little impact on long-term investment results. A well-diversified balanced portfolio is a time-tested strategy for long-term capital. This was never more evident than with the bounce back in January. Market volatility is common.

As always if you have any questions feel free to reach out.

Best regards,
Bob

This material contains the current opinions of the author but not necessarily those of The Guardian Life Insurance Company (Guardian), New York, NY or its subsidiaries and such opinions are subject to change without notice.

This material is intended for general public use and is for educational purposes only.  By providing this content, Park Avenue Securities LLC is not undertaking to provide any recommendations or investment advice regarding any specific account type, service, investment strategy or product to any specific individual or situation, or to otherwise act in any fiduciary or other capacity.  Please contact a financial professional for guidance and information that is specific to your individual situation.  Russell 2000 Index measures the performance of the smallest 2,000 companies in the Russell 3000 Index of the 3,000 largest U.S. companies in terms of market capitalization. The Hang Seng Index is a free float-adjusted market-capitalization-weighted stock-market index in Hong Kong. S&P 500 Index is a market index generally considered representative of the stock market as a whole. The index focuses on the large-cap segment of the U.S. equities market. NASDAQ Composite Index is a market value-weighted index that measures all NASDAQ domestic and non-U.S. based common stocks listed on the NASDAQ stock market. Each company's security affects the index in proportion to its market value.  Indices are unmanaged, and one cannot invest directly in an index. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest rate, issuer, credit and inflation risk. Equities may decline in value due to both real and perceived general market, economic and industry conditions Opinions expressed are those of the author and not necessarily those of Guardian or PAS. 2023-150567 Exp 2/25

Source Bloomberg,  Nasdaq