Regional Banks Turmoil, Solid Job Growth, Weak Corporate Earnings
What's happened recently?
The turbulence in the banking sector and broader markets has largely subsided in the last couple of weeks. The larger impact across the banking sector seems limited given the intervention from the federal government as well as broader industry leaders.
We continue to remain cautious about any potential broader economic turmoil from these tremors and impact from reduced borrowing activity. This credit contraction, along with other headwinds, could lead to reduced economic growth.
To mitigate risks from uncertainties in the markets, we believe in having responsible cash management, evaluating your goals, and ensuring that you have properly diversified and tailored investments. Please reach out if your objectives or risk tolerance have changed and/or to discuss making changes to your asset allocation.
Here are a few things standing out in the news:
- Solid March 2023 jobs report
- March 2023 Consumer Price Index (CPI) report
- Recessionary fears continue & sluggish corporate earnings
Why is this important?
The March jobs report and CPI figures are important clues that many in the market use to try to “predict” how the Fed may act next.
- The March Jobs report was solid: it didn’t show a meaningful decline in new hirings, which would have stoked recession fears, nor did it show a massive increase in hiring, which would have stoked inflation fears.
- While March CPI results were broadly in line with expectations, there isn’t total market consensus as to what the Fed will do in their next policy meeting.
- A recession could be both a good and a bad thing in today’s environment. How? Recession -> reduced demand -> price reduction -> declining inflation -> Fed cuts rates→ economy is stimulated. Obviously, this is overly simplistic and the extent to which it is either good or bad depends on the magnitude of the recession, demand and price reduction, and the Fed’s reaction.
What's our take?
We don’t think the Fed is done with interest rate hikes, though the future is impossible to predict. For what it’s worth, the market is terrible at predicting how the Fed will change interest rates:
Inflation remains elevated and the Fed continues to adhere to its dual mandate of price stability (~2% inflation) and maximum employment. Signs of cooling in prices are leading to readjusted market expectations for future Fed rate hikes after next month’s policy meeting. However, the Fed may continue to act, albeit slowly, until either there’s a consistent path to price stability that’s in line with long-term averages or a shift in employment.