2023 is proving to be anything but an average, run-of-the-mill year. 

On the economic front, we have a Federal Reserve, led by Fed Chairman Jerome Powell, that is determined to stop inflation cold in its tracks. And the Fed’s inflation-fighting weapon is, as you’d expect, interest rates. 

Jerome and his buddies have pushed interest rates from near zero to around 5% for about twelve months. Traders increasingly believe that the Fed will keep rates in their current range of 4.75% to 5% at the May 3rd Federal Open Market Committee (FOMC) meeting, but that’s a HUGE change from what they expected just one month ago. 

On March 3, 2023, traders placed a 65% probability on the Fed raising rates by another quarter point and around 33% that the Fed would take the giant leap and hike by another half point. 

What changed? Why aren’t traders expecting another hike in May? 

The Fed’s aggressive rate hike campaign over the past year is finally impacting the economy. Output is slowing, home prices are declining, rental rates are falling, and the available number of jobs in the U.S. is dropping fast. 

It seems like jobs are plentiful, but on Tuesday, April 4, 2023, the JOLTs job openings data showed fewer than 10 million open jobs in the U.S. for the first time since May 2021. It’s only a single data point, but it’s a real-time indication of a declining job market. 

Here’s where things get interesting…

I’ve seen data floating around that indicates rental rates for apartments, condos, and homes are falling hard and fast. This matters because the rental equivalent is a massive component of the CPI. Put another way, inflation (in some, but not all areas) may already be significantly lower than the Fed realizes. 

The Fed could have its hands on this data if it practiced a little common sense. 

How? It’s easy. 

Contact the owner/operators of some of the largest REITs in the country. These guys manage leases and adjust prices to ensure their properties are fully occupied. 

In a nutshell, if you want to know how rental rates are trending, speak to the guys setting the prices and filling out the lease applications!

A Word No One Likes to Hear 

Declining rental rates will impact the consumer price index (CPI) inflation data, but let’s be honest, there are still other areas of the economy where prices remain stubbornly high. And as challenging as elevated inflation can be, it’s made much worse when gross domestic product and corporate growth begin to decline. 

Stagflation isn’t a word I or anyone likes to throw around lightly. Unfortunately, if inflation remains above trend and economic growth hits the skids, we’ll be staring at a situation where prices are high and growth is flat or in decline. 

And that’s a recipe for a terrible economic environment!

The most important data points we’ll receive over the next couple of months are the monthly employment report, the monthly inflation data, and corporate earnings. The combination of the three will paint a moderately clearer picture regarding the future of the U.S. economy. 

As challenging an investing environment as this has been, we are far closer to a new bull market than the beginning of the bear market. My team continues to compile a list of companies we believe you should own as this economy and stock market emerge out of its year-plus funk. 

Stay tuned, as the clouds always lift. Sometimes it takes a bit longer for the sun to shine than we would like.