If you haven’t read the book, I strongly recommend Martin Zweig’s Winning on Wall Street, first published in 1970. In this classic tome, Zweig coined the famous phrase “don’t fight the Fed,” which has become Wall Street’s mantra ever since.

My wife Carole, who likes to needle me about my profession, recently bought me a T-shirt emblazoned with the words Don’t Fight The Fed. The concept behind the aphorism is simple, but powerful.

The Federal Reserve manages liquidity, the boom and busts of economic cycles, and long-term interest rates. Hence, it makes sense to position your investment strategy and portfolio allocation in alignment with Fed monetary policies.

The Fed’s policy-making arm, the Federal Open Market Committee (FOMC), concluded its December 13-14 policy meeting, with a momentous decision that sets the investment table for 2023.

As widely expected, the FOMC on Wednesday announced a 0.50% (50 basis points, or bps) hike in interest rates. A basis point is one-hundredth of a percentage point. The new targeted rate range is between 4.25% and 4.5%, the highest in 15 years. The Fed raised its 2023 funds rate outlook to 5.1%.

The Fed’s step down from its four consecutive rate hikes this year of 0.75% was facilitated by favorable U.S. producer and consumer price reports for November. The Fed’s balancing act is paying off, and it’s increasingly possible that we’ll actually see a “soft landing” for the economy.

During his post-meeting press conference, Fed Chair Jerome Powell emphasized the importance of not wavering in the fight against inflation. “Participants continue to see risks to inflation as weighted to the upside,” Powell said.

In response to the Fed’s announcement Wednesday, the main U.S. stock market indices closed lower in choppy trading, as follows:

• DJIA: -0.42%
• S&P 500: -0.61%
• NASDAQ: -0.76%
• Russell 2000: -0.65%

Wall Street had priced in the 50 bps increase. Another aphorism comes to mind: buy on the rumor, sell on the news.

Powell also adopted a stern tone that weighed on stocks. We’ve seen that movie before.

The Fed gets elbow room…

Inflation has peaked and it’s markedly falling in the U.S., as this chart demonstrates:

Of course, inflation still has a long way to drop before it reaches the Fed’s annual target of 2%. And investors who expected a “dovish pivot” earlier this year got their hopes crushed.

But let’s take a global perspective.

In the United Kingdom, the government announced Wednesday that the Consumer Price Index (CPI) reached an annual rate of 10.7% in November, whereas U.S. CPI inflation for that month came in at 7.1%. Indeed, the U.K. has lapsed into a period of stagflation and could be facing a lost economic decade. A major culprit for Britain’s economic woes is Brexit, a decision that most Brits now sorely regret.

In Japan, CPI inflation stands at 9.3%. In five countries (Zimbabwe, Lebanon, Venezuela, Syria, and Sudan), the CPI is running into the triple digits. The average global CPI inflation rate is 8.8%.

These global CPI figures refute the falsehood that U.S. inflation is the result of the Biden administration’s stimulus spending. Regardless, now that the midterm elections are over, the political focus has changed. Who knew the policy formulas for solving inflation were on Hunter Biden’s laptop?

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The good news is, supply chains are healing, energy markets are stabilizing, transportation bottlenecks are easing, and global ocean shipping costs are falling. As of this writing, gasoline prices in the U.S. have dropped to a nationwide average of $3.23 per gallon.

The Fed still has more work to do, but inflation will be much less of a worry in the U.S. in 2023. The inflection point that we’ve reached on inflation is likely a sign that a new bull market is on the cusp of being born.

The consensus among many analysts is that a core CPI of about 3% and falling, which is closer to the Fed’s target, would give the central bank sufficient leeway to ease up on tightening.

Economists at investment bank Goldman Sachs (NYSE: GS) asserted in November that they see inflation “finally falling” in 2023, with core prices poised to drop under 3% as wage growth slows.

The end of the Fed’s rate tightening cycle hasn’t occurred yet, but it’s getting closer and the central bank’s hawkishness is waning. That sets up the stock market for solid gains in 2023.

Editor’s Note: What are your views on inflation? Let’s get a dialogue going. You can reach me at: mailbag@investingdaily.com.

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