This Week in Review:

Will the Fed Blink First?

The pros and cons of keep rates higher for longer

Markets bobbed this week as bulls and bears duked it out over prospects for an economic “soft landing” and its potential impact on stocks and bonds. Bulls point to consumer strength, slowing inflation and an economy that created over a half million jobs in January as reasons for optimism.

Polaris Investment Team |

This Week:

Bears see economic strength and (still) stubbornly high inflation as impetus for the Federal Reserve to keep interest rates higher for longer, which would be a headwind for stocks and could cause at least a mild recession.

Here’s what else we’ve been watching this week:

  • The consumer price index (CPI) rose 6.4% in January compared to the same time last year. That said, the data also marked the seventh consecutive month that the annual pace of inflation has slowed (it was 6.5% in December). While the Fed’s aggressive interest-rate hikes may have tempered inflation somewhat—it’s down from the 9.1% June 2022 peak—we’re still a far cry from the central bank’s 2% target. The recent decline has come mostly from lower energy, airfare, medical care, apparel, and new and used car prices; inflation rates for housing and dining out are up since June but have been outweighed by the declines elsewhere. Several Fed officials publicly commented this week that it’s likely they’ll need to do more hiking to bring inflation to heel.
  • The U.S. consumer is proving resilient. Retail sales bounced back in a big way in January, up 3% from December. Gains were broad-based, with spending up at restaurants, department stores and car dealerships. The rebound reversed two months of declines during the traditionally robust holiday shopping season and marked the biggest monthly increase in nearly two years. With consumer spending accounting for 70% of our economy, this is hardly a harbinger of imminent recession.
  • Earnings season for the fourth quarter of 2022 is nearly at an end and may hint at some weakness in corporate profits. While still high by historical standards, profit margins for S&P 500 companies are set to fall for the second straight quarter, dipping to around 12% (down from 13% in June 2022 and nearly 14% in June 2021). In past economic cycles, this type of move has preceded layoffs, but there are a few wrinkles this time around. For one, the difficulty of finding employees for open roles may make companies less willing to cut costs through layoffs. And if managers believe we’ll have a short recession or none at all, they may position for recovery instead of contraction. You can read more on jobs and recession in our Chart of the Week below.

Strong Job Market, Low Recession Risk?

By Brett Miller, CFA, CFP®, Portfolio Manager 

Several Fridays ago, market watchers were surprised by jobs data that showed continued strength in the labor market. In January, the number of new jobs almost doubled month over month, as the economy gained 517,000 jobs. This crushed market and economists’ predictions. Unemployment fell to 3.4%—the lowest in 53 years.

With that news, investors continue to wonder, “Where’s the recession? It can’t possibly be imminent with such strength, right?” Well, as the chart below shows, eight of the nine recessions since 1959 began with unemployment at or near its lowest point in the economic cycle.

This makes sense. It’s at times like these that the Federal Reserve begins to apply the brakes by raising interest rates. That’s particularly true today, as the pandemic led to historic stimulative measures and ultralow interest rates, resulting in inflation.

Now the Fed has embarked on one of the fastest rate-hike campaigns in its history in an attempt to slow inflation. The economy has withstood these rate hikes better than many economists predicted.

Jobs tend to be the last part of the economy impacted by higher rates. If history is any guide, we may start to see some weakness emerging in the labor market this year. Stay tuned.

Note: Chart shows headline unemployment rate along with periods of recession from December 1959 through January 2023. Sources: Federal Reserve Bank of St. Louis, National Bureau of Economic Research.

Sunsets and Tax Cuts

Manager of Financial Planning Andrew Busa, MSPFP, CFP®, MPAS®, CCFC 

Who doesn’t love a good sunset? I know I do…except when it entails higher taxes.

When the clock strikes midnight on Dec. 31, 2025, the sun will set on the Tax Cuts and Jobs Act of 2017 (TCJA). Unless Congress acts in advance to preserve some or all of it, tax and estate planning implications will reverberate far and wide. The good news? We have more than two years to work with you to make sure your financial plans are in order—and we will.

Here are some highlights of what will change if the TCJA is allowed to expire:

    • Unified tax credit cut in half. Thanks to TCJA, the federal gift and estate tax exemption is a whopping $12.92 million. Because of portability, that number doubles for married couples. You will also see this number referred to as the “unified credit,” which is the dollar amount one can gift and/or pass on to the next generation before gift tax or estate tax is due. If TCJA sunsets, the figure will revert to $5.49 million, adjusted for inflation.
    • Personal income tax rates revert. The TCJA decreased personal tax rates across the board. Those rates will revert to their prior levels at the end of 2025. For high-income earners, that means a return to the 39.6% marginal rate from the current 37%.
    • Alternative minimum tax (AMT) gets teeth. The AMT is intended to close the loopholes that allow high-net-worth individuals to reduce or eliminate their taxes. In 2018, the number of U.S. taxpayers impacted by the AMT was 200,000—but that number will almost certainly rise exponentially in 2025 if the TCJA expires as scheduled and the AMT exemption falls dramatically.

All of this adds up to an appreciable increase in taxes due for certain taxpayers should the TCJA fade away. Stay tuned for a part 2 to this section in the coming weeks, plus our advice on what you can do—including accelerating Roth IRA conversions, considering a spousal lifetime access trust and much more.

In the meantime, contact your wealth adviser with questions and concerns. We are ready to help.

Looking Ahead

Next week, markets and our offices will be closed Monday in observance of Presidents Day. We’ll be back at our desks on Tuesday morning.

Following the long weekend, we’ll be poring over the latest data on the service sector and manufacturing, existing home sales, first-quarter GDP, consumer spending, personal income, new home sales, consumer sentiment and inflation, as well as minutes from the Fed’s meeting earlier this month.

If you’d like to learn more about our tactical or fundamental strategies, please contact our team at 800-268-9046 or

Please note: This update was prepared on Friday, February 17, 2023, prior to the market’s close.

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