In the Market & Economic Outlook, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
April Commentary & 1st Quarter 2023 Recap
Stocks rallied sharply to start the year as inflation subsided and investors grew increasingly confident that the Federal Reserve was nearly done raising interest rates. But when Silicon Valley Bank and Signature Bank collapsed, stocks gave back most of those gains. When conditions stabilized and the Fed suggested they were almost done with their tightening cycle, stocks rallied, and the S&P 500 finished up 7% in the first quarter of 2023. Bonds have also turned around after suffering their worst calendar year loss ever in 2022. The US Aggregate Bond Index gained 2.91% this past quarter.
The Conference Board forecasts that “economic weakness will intensify and spread more widely throughout the US economy over the coming months, leading to a recession starting in mid-2023”. We agree with this forecast, believing that a significant economic slowdown is underway, and we will likely see a recession later this year.
The Fed still has more work to do in raising rates to bring down inflation, and that won’t be without economic pain. Consumers and businesses have been surprisingly resilient to higher inflation and higher interest rates, but the cracks are starting to appear – a rapidly cooling housing market, corporate layoffs, and higher delinquency rates on credit cards, etc. Treasury yields and an inverted yield curve (where shorter-term rates are higher than longer term rates) also point to an imminent recession. After the Silicon Valley Bank failure, a credit crunch seems inevitable as banks struggle in this rising interest rate environment. The result will be even slower growth as businesses will find it harder to borrow, grow and expand.
What’s interesting about the factors currently driving the economy, markets and portfolio returns is that we’re already 15 months into the current stock market downturn, yet we haven’t yet officially entered a recession. Usually, stock market downturns accompanied by a recession last about 12-18 months, so based on historical norms we should be almost “out of the woods”. If the recession hasn’t arrived, but is coming soon, that means we’re likely going to experience another calendar year of below average growth. We think it’s possible that the worst is behind us in the stock and bond markets, but with an economic slowdown comes additional downward pressure on stocks. We think that 2023 could be a year of treading water for most investors – not much growth from beginning to end.
So, what’s the good news? The rapid rise in interest rates has provided the first great investment opportunity for fixed income investors in 15 years. Short-term money market funds and CDs are currently paying 4.5% – 5%, and investors are finally being rewarded with higher yields after a very long period of low interest rates. We have been recommending money market funds and short-term CDs to clients with idle cash and keeping maturities short to intermediate for bond investors. This has allowed us to take advantage of higher yields without the duration risk of owning longer-term bonds.
The key in 2023 is to remain picky with stock and bond selection. Quality always matters, but especially during difficult and volatile economic periods. We are positioning client portfolios defensively, which should help provide stability during uncertain times ahead.
We believe a significant economic slowdown is underway, and it’s likely a recession will arrive later this year. The banking crisis will likely contribute to a credit crunch, slower economic growth, and a drop in earnings for stocks. Yet, opportunities still exist for investors, especially in high quality stocks and bonds.