· All major indices pushed higher this week, fueled by the anticipation of slowing inflation and then confirmation of that belief on Thursday with the release of the Consumer Price Index (CPI) for December. The overall CPI fell 0.1% for the month and in doing so market the first monthly decline since May 2020.

o The largest contributor to the monthly decrease was the 4.5% drop in overall energy prices (+7.3% y/y). Gasoline prices fell 9.4% during December and have now fallen by 1.5% y/y.

o Despite the fact that the CPI has risen 6.5% y/y, the trend is downward which can be evidenced by the fact that over the past six and three months it has risen at an annualized rate of just 1.8% and 0.6%, respectively. At 6.5%, year-over-year inflation remains well below the 9.1% rate recorded during June 2022.

o Excluding food and energy, the so-called core CPI rose 0.3% (+5.7% y/y) as inflation for food at home cooled to 0.2% (+11.8% y/y) during December and, as with the over CPI is on a downward trend, rising at an annualized pace of 4.4% over the past three months.

o The cost of shelter, which carries a weighting of 32.93% within the Consumer Price Index, rose 0.8% during December and has risen by 7.5% over the past twelve months.

o Although encouraged by this report, we recognize that it is only one of many that need to be trending lower for the Fed to move off its hawkish stance. We also recognize that the core CPI will most likely remain elevated as it tends to be “stickier”, as it accounts for goods and, more importantly, services.

· In addition to the above, stocks also rose on hopes that the Fed could navigate a “soft landing,” defined as either slowing economic growth down to the Fed’s target or perhaps even a mild recession. Many believe, as do we, that if the Fed can manage either of these outcomes, stocks are reasonably priced.

· The question we toil with is how steep of a downward glide path the Fed wants in regard to slowing inflation. Fed Chair Jerome Powell as well as other members of the Federal Reserve have left no doubt that 2% inflation is their target. What is open to debate is how much damage to the economy will the Fed risk to get there sooner rather than later.

· At this time, we believe calendar year 2023 will be one during which the Fed pauses, but does not pivot as it will move likely remain hawkish for longer than expected. Consider the recent statement by Atlanta Federal Reserve President Raphael Bostic, “fair to say that the Fed is willing to overshoot”

· Earnings season has begun as JP Morgan, Wells Fargo, Bank of America and Citigroup all reported earnings Friday. After selling off initially and bringing futures lower, all of the above banks ended higher by the end of trading.

· JP Morgan, our eighth largest common stock holding, beat earnings estimates on the top and bottom with EPS of $3.57 vs. consensus estimates of $3.07 and revenue $35.57 billion vs. consensus estimates of $34.40 billion. Jamie Dimon, JP Morgan CEO backtracked on his Financial Weather Forecast of last year when he said that an “economic hurricane” was coming. This pas t week Dimon issued somewhat of a mea culpa noting that perhaps he “shouldn’t ever have used the word hurricane,” but nonetheless consumers faced a heightened degree of uncertainty.

· Speaking of weather (loosely), if 2022 revealed who was “swimming naked” then were those that were not swimming naked in 2022 swimming naked for the prior ten years when growth substantially outperformed value?

· Is the year-to-date recovery in beaten up sectors of the market merely a rebound from tax loss selling or the start of something longer lasting? On balance, we believe so. However, we also believe that gains from this point will be disbursed over a much wider number of sectors as compared to 2022 (energy) or the previous bull cycle (growth) that lasted from 2009-2021.

· The onslaught of economic data continues this coming week. Reports include, on Wednesday, December Wholesale Inflation as represented by the Producer Price Index (PPI), December Retail Sales, Industrial Production and Capacity Utilization for December and November Business Inventories; on Thursday, the Weekly Report of Initial Claims for Unemployment Insurance and December Housing Starts; and on Friday, December Sales of Existing Homes.

· As noted above, many of the largest banks in the country reported earnings this past week. However, the corporate earnings season is in full swing and investors will be closely watching the results, to include those from Morgan Stanley (MS), Goldman Sachs (GS), Citizens Financial (CFG), Kinder Morgan (KMI), Discover Financial (DFS), PNC Financial (PNC), Charles Schwab (SCHW), Procter & Gamble (PG), Netflix (NFLX), Fastenal (FAST), M&T Bank (MTB), Fifth Third (FTB), PPG Industries (PPG), Northern Trust (NTRS), State Street (STT), Regions Financial (RF) and SLB (SLB).

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