Spring 2023 Market Overview & Economic Update

There have been lingering issues that have continued to hover over the markets and the economy in general coming into the most recent Federal Reserve Bank (the Fed) meeting. The Fed raised rates for the 10th time since March of 2022.  Inflation continues to be the primary topic of concern and one of the key elements ever present on the Fed’s list of items that need to be controlled to maintain a healthy economy.  The other focus is the U.S. employment picture.

The Fed began tracking inflation aggressively at the outset of the pandemic.  There was concern that the abundance of stimulus money flowing to the consumer and to corporations would create a spending frenzy and eventually force prices upward on goods and services.  Another concern was that the unemployment rate, which had risen to 13.8% at the peak of the pandemic, was now dropping sharply. Unemployment is currently 3.5%.  The reason for concern was that all this new money resulting from higher employment, coupled with stimulus money, would be chasing limited goods and services.  Pandemic related supply chain limitations set up the perfect scenario of too much money chasing too few goods, which pushed prices higher.  This is a roadmap for inflation.

There has been much speculation as to how high the Fed might go in raising interest rates to get the inflation to a target 2%. The Fed Governors feel that this is an acceptable and controllable level of inflation.  The inflation gauge (CPI) hit a high of 8.5%-9% in 2022.  It currently sits at 4.9% as of the first week in May.  The current fed funds rate sits at 5-5.25% as of the most recent meeting of May 3.  It appears that the Fed is making its point since inflation is falling below the fed funds rate.  It will be important to see if inflation will continue to come down in a consistent manner.  So far, the CPI has fallen for 12 straight months.  This is a good overall sign that the rate increases have slowed inflation and prices. The employment rate has remained steady at 3.5% despite 200,000 people filing for unemployment benefits monthly.  It does appear that the employment levels will remain at this level for now.

The financial markets continue to show modest growth in 2023 after a tough 2022.  Corporate earnings in the first quarter of 2023 were somewhat muted compared to the raging stock markets that we saw in 2020 and 2021.  As of the end of April, over 75% of the S&P companies declared first quarter earnings that exceeded analyst expectations. The economy may take some time to fully balance out.  However, it appears that we are headed in the right direction.

Short-term concerns have created some volatility in the markets, more specifically the banking sector.  Silicon Valley Bank (SVB), a bank that is not your standard consumer institution, had a brief run from customers seeking to pull cash from a bank that was near default.  SVB is a bank that focuses on the technology industry.  Coupled with the most recent volatility in the technology sector, the bank’s own portfolio was centered on holding bonds and investments that were further out on the yield curve (longer term instruments that were more sensitive to the up and down movements in interest rates.)  This prompted other banks with a similar focus to also experience a loss of deposits.  The federal government quickly stepped in and offered to guarantee all customer cash assets, not simply the $100,000 FDIC limit.  This was followed by Chase Bank leading the pack of large banks quickly stepping in to buy the failing banks. This was further followed with an acknowledgement by federal regulators that they had not exercised strict enough financial controls over those banks. I am never surprised at how short corporate and government memories are after having just come out of a financial crisis ten years prior.

The other short-term concern is the looming debt ceiling crisis.  There is no doubt that this country spends a lot of money.  Defense, Medicare and Social Security are almost half of the spending.  As far as Medicare and Social Security are concerned, these are promises made to the American taxpayer who have personally contributed to this federally sponsored retirement plan. It is hard to justify attacking Social Security.  Defense has fluctuated throughout the years, but for the decades following Reagan’s war of wills with the Soviet Union, defense has become a bigger part of the budget.

It will be interesting to follow how Washington handles expanding the debt ceiling. This could be messy for the markets if the negotiating parties don’t offer reasonable solutions. Some may remember the same thing happened in 2011 and again in 2013. Political chess games create nervous markets. Fortunately, the markets quickly recovered when fruitful solutions were reached.

I remain an optimist.  I am also a realist.  I know that things don’t always go the way we think that they should when we want them to happen. However, I have faith in the greatest economy in the world. The markets will continue to be the best source of financial growth for investors. Despite current financial challenges, corporate earnings are continuing to outpace analysts’ expectations; inflation continues to drop, and employment remains strong. These are all signs of a healthy recovery.  I am confident that we are headed in the right direction.

Please feel free to reach out if I can address any questions that you may have.

 

Ruben E. Guerra

Guerra Investment Advisors