April Economic Update
March was full of twists and turns as stressors within the banking system shifted market sentiment as investors weighed the Federal Reserve’s next moves in light of these developments. The month began with a slump with manufacturing data reflecting slower growth, followed by the failure of three US banks. By mid-month, the market found traction within the tech sector and artificial intelligence stocks which led the major indices higher to end the month. The Dow Jones Industrial Average rose 1.89%, the S&P 500 Index retraced higher by 3.51%, and the tech-heavy Nasdaq 100 Composite benefited the most gaining 9.46%. (1,2)
Over the past several months, market participants and the Federal Reserve have been increasingly focused on the “lag effects” from the rise in interest rates over the past year. Up until last month, the direct impact of those interest rate hikes had not been directly seen or felt within any particular asset class. This all changed last month when depositors suddenly withdrew funds from Silicon Valley Bank (SVB) which sparked a chain reaction within the banking system which culminated in the closure of SVB and two other banks. (2)
While there were many reasons why this occurred, including questionable risk management by these banks, the crisis itself can largely be attributed to the rapid rise in interest rates which took several months before strains within the system came to the surface. While the stresses within the banking system appear to be stabilizing, the longer-term impacts will play out over the next several months as banks recover from deposits leaving their institutions. This was the first of likely many scenarios to come regarding the lag effect of higher interest rates and will likely see other sectors within the economy impacted in the coming months.
The Federal Reserve
The week following week the collapse of SVB, Federal Reserve Chair Jerome Powell announced another 0.25% interest rate increase, bringing the short-term rate up to a range of 4.75%-5.00%. At the previous announcement back in February, the Fed had implied they would continue to raise interest rates up to 5.50%-5.75% before pausing to assess the economic impacts.
During his press conference in March, Powell pulled back on those comments, citing the new stressors within the banking sector will likely have the same impact to slow down the economy as raising rates above 5.50%.
Currently, the market is expecting peak rates to top out at their present levels or 0.25% higher, but it will largely be dependent upon the rate of change to inflation and/or any further impacts that may arise from higher rates, as seen within the banking sector last month.
The next several months will continue to have unexpected twists and turns as new economic data is released and the market and real economy begins to experience the effects of higher interest rates.
Several leading indicators such as ISM and PMI Manufacturing data are signaling a slowdown for the economy by the middle to end of the year. If a slowdown does occur later this year, the question will become to what extent do we see contraction. A mild recession may only result with the markets continuing to move within the same trading ranges as it waits for the economic cycle to run its course. On the other hand, if inflation rapidly abates to allow interest rates to be lowered, the downward pressures on growth would be lifted and we could avert a slowdown cycle altogether.
All major US stock indices have remained within a sideways trading range from May of last year and down to the lows seen back in October. We expect this pattern will likely continue through the next 1-3 months as the market continues to digest this complex and ever-changing macroeconomic environment. (4)
Monthly Financial Tip:
Limit your credit card use to 30% of available credit. Approaching the maximum limit on your credit cards has a negative impact on your credit rating.
1. CNBC, March 13, 2023
2. WSJ.com, March 31, 2023
3. Yardeni.com, April 5, 2023
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.