Weekly Commentary (3/27/23) – Markets Push Higher Despite Fed Hike and Banking Fears   

March 27, 2023

Both equity and fixed income markets continue to show persistent volatility, but both sides of the market still rose last week.  Rates and stock price levels gyrated throughout the week in anticipation of, and then in reaction to, the FOMC’s interest rate decision and its commentary thereon.  The verdict: confusion.  The market loathes uncertainty, and it is very blurry view for those who try to model and predict the economic environment we are moving towards.  Will the Fed cut? When? Will they hold? For how long? Have we hit a rut in the move towards lower inflation? Will we have a sharp rise in unemployment and a “hard landing” or can we “slow grow” our way out of high inflation?  There is also the growing threat of global geo-political tensions intensifying and the event risks that portends.

For the week, the DJIA gained 1.18% and the S&P 500 added 1.41%.  The tech-heavy Nasdaq finished up 1.67% as lower (market) rates continued to draw investors to tech stocks.  For the week, the MSCI EAFE Index rose 1.59% as fears of a spreading bank crisis subsided and European investors bid prices higher.   Emerging market equities (MSCI EM) had the largest advance among the major indices by jumping 2.23% over the week.  Small company stocks, represented by the Russell 2000, struggled but still added 0.53% – its relatively higher exposure regional banks has been a headwind since SVB imploded. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished higher by 0.5% for the week as investors are still pushing yields lower despite the backdrop of the Fed hiking rates and suggesting its Fed Funds target rate is not going to be adjusted down for quite some time.  As a result, the 10 YR US Treasury closed at a yield of 3.38% (down 5bps from the previous week’s closing yield of ~3.43%). Gold inched higher by 1.06% to close at $1,994/oz.  Oil prices recovered $3.22 to close at $69.96/bbl.

During the past week, fears of banking issues lingered over the financial markets.  There is the fear of real fundamental issues, and there is also the fear of others overreacting and panicking – “the fear of the fear”.  In general, investors are absorbing the SVB/Signature/Credit Suisse developments reasonably well and it seems there is higher probability that there is no contagion spreading and investors can resume having confidence in the banking system.

The coming week’s economic data releases includes the Personal Consumption Expenditures price index (PCE) on Friday.  This is the Fed’s “preferred measure of inflation” and forecasts predict this will show signs of cooling inflation – January’s number was 5.4% YoY and was hotter than December.  Housing data (S&P Case-Shiller home price index, FHFA home price index, and Pending U.S. home sales) is released this week, as well, and is expected to show further contraction in housing activity.  Michael Barr is testifying before Congress on banking on Tuesday and Wednesday and given the recent focus on banking regulation and enforcement, his testimony will get some attention, but no major reveals are expected.

Spring is here notwithstanding what the groundhog predicted – another pundit making predictions without fear of reprisal despite frequent fails!  We predict more choppy sailing as the economy is weaned off easy money and fiscal stimulus.  Stay patient.

 “People often say there’s lots of uncertainty, but when was there ever certainty in the markets, the economy, or the future? I’m just trying to understand the present.”  – Bill Miller