The Stock Market Is Off To A Great Start In 2023 — Here's How The Federal Reserve, Interest Rates May Change That

It may not exactly feel like a boom, but the stock market is off to an incredible start to 2023. According to MacroTrends.net, the S&P 500’s best year ever was 1933, when it rose more than 45%, recovering from the Great Depression.

So far, the S&P 500 SPDR Index (NYSE: SPY), which tracks the S&P 500, is up 7.77% year-to-date. But just because we’ve started the year strong does mean the market has to keep going up, and in fact, it might just become harder for it to do so. 

The Fed's Position: A strong underlying economy and labor market mean the Federal Reserve is able to keep interest rates higher to tackle inflation without having to worry about a huge increase in unemployment. Fed Chair Jerome Powell said Tuesday that more rate hikes are needed amid the strong labor market.

What This Market Researcher Expects: “My outlook is that markets currently price 150-200 basis points of cuts in the next two years after peaking just above 5%,” Andy Constan, head of the macro research firm Damped Spring Advisors, tells Benzinga.

“I expect regardless of any outcome — besides a financial stability problem — the Fed will keep interest rates higher than is priced.”

The Fed will end up having to keep interest rates higher for longer than what the bond and equity markets are pricing in, in Constan's view.

Typically, higher interest rates mean that stock-market returns are muted. Specifically, higher interest rates hurt high-growth, debt-carrying companies the hardest.

The Last Word: Although the market is off to a great start in 2023, the Federal Reserve may be forced to keep interest rates high in order to curb inflation.

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