Market Insight Q1 2023
Market Review and Commentary
When the quarter began, all eyes were on the Federal Reserve (the Fed). The question on everyone’s mind was how high is the Fed willing to push rates to drive inflation back to their stated two percent target? The Fed had already slowed its cadence from 75 basis points in November to 50 in December and 25 in February. Hotter-than-expected inflation data earlier in the quarter heightened speculation that perhaps the Fed would increase rates again by 50 basis points at the March meeting and likely add on a few more hikes by mid-year.
However, the failures of SVB Financial and Signature Bank and the forced buyout of Credit Suisse by UBS Group AG changed the focus for investors and, ultimately, the Fed, resulting in a 25 basis point increase at the March meeting. In prepared remarks, the Fed also stated it was rather noncommittal regarding its future activity. Furthermore, in an effort to contain these failures, the Fed announced it would make available additional funding to eligible depository institutions to help assure that banks have the ability to meet the needs of all their depositors. In doing so, the Fed has once again started raising the size of its balance sheet to nearly $9 trillion. These actions have caused a reset in the markets and our thinking, with the belief that they will now likely hit the “pause button” at the May meeting and wait and see how recent financial news will impact the economy and inflation.
Academic debates continue regarding the time lag between changes in monetary policy and inflation. And while some argue it is as short as six months, others claim it can be up to two years. Either way, the Fed is always at the disadvantage of driving while looking in the rearview mirror. We believe the recent difficulty in the banking sector will likely lead to tighter regulation and further credit tightening. Typically, the economy needs credit expansion to grow, so a pullback in lending could weigh on the economy.
As for the broader markets, we are cautiously optimistic. Granted, an economic downturn may very well be in the cards for later this year, and inflation is still not under control, but valuations have come in quite a bit over the past year and a half. As always, we continue to work diligently to deliver the best risk-adjusted returns for our clients. We truly appreciate the confidence you place in us. It is a responsibility we do not take for granted or lightly. Please do not hesitate to reach out to us with any questions.