The Consumer Price Index’s decline of 0.10% for December, while surprising to some, was not entirely unanticipated. The mechanics of the CPI is such that monthly declines can occur following major increases. The CPI fell for one month, but of course the consumer’s cost of living is still much higher today that in December 2021.

Even so, the anticipation and reality of a one-month decline in the CPI excited part of the market to produce robust gains for a few days followed by a more tepid response. It started a stock and bond rally that in turn pumped up the enthusiasm of the consumer, a virtuous circle. There is no doubt that many investors expect Fed rate increases to be smaller and maybe less frequent.

However, the rate hikes to date have been so dramatic and so frequent and so out of the historic norm that we really don’t know how long it will take for them to have the intended effect of slowing inflation to a 2% annual rate. Federal Reserve Chairman Jerome Powell reiterates that more interest hikes are probable, and that they may stay in place for longer than generally anticipated.

Our view is that it is too early to say that the malaise we saw in 2022 is over. Yes, we are close to the turn, but we might have another dip before the upturn begins in earnest. In this kind of environment, we want to stay close to our benchmark. We believe our 65% weighting in stocks is still appropriate.

The one change that we do see is that fixed income is now much more attractive and will be more competitive with stocks than has been the case in the last several years. Investors can now quite easily earn 4% or more by purchasing investment grade bonds maturing in two or three years. In our case, we will most likely increase the maturity of our bond holdings by selling very short-term money market funds and buying longer dated fixed income instruments.

Chris Maxwell, Vice Chair, Board of Managers

Easton Episcopal Funds