{"id":6712,"date":"2023-04-04T12:05:27","date_gmt":"2023-04-04T18:05:27","guid":{"rendered":"https:\/\/www.keystonefinancial.com\/?post_type=oi_article&p=6712"},"modified":"2023-04-04T12:05:28","modified_gmt":"2023-04-04T18:05:28","slug":"market-commentary-april-4-2023","status":"publish","type":"oi_article","link":"https:\/\/www.keystonefinancial.com\/articles\/market-commentary-april-4-2023","title":{"rendered":"Market Commentary | April 4, 2023"},"content":{"rendered":"\n
Perhaps we should call this a pushmi-pullyu market.<\/p>\n\n\n\n
The first quarter of 2023 brought Dr. Dolittle\u2019s pushmi-pullyu \u2013 the rarest animal of all \u2013 to mind. It is the offspring of goat-antelopes and unicorns, and has a head at each end of its body. The pushmi-pullyu\u2019s unusual anatomy allows it to easily and rapidly change direction, making it difficult to catch.<\/p>\n\n\n\n
So far this year, the direction of the economy and financial markets has been elusive, too.<\/p>\n\n\n\n
Is inflation headed in the right direction? Inflation changed course late in 2022. The monthly change in the rate of inflation, as measured by the PCE Core Price Index (one of the Federal Reserve\u2019s preferred inflation gauges) accelerated late in 2022 and continued to move higher in January 2023. Then, it slowed in February, creating uncertainty about the state of inflation.<\/p>\n\n\n\n
The latest University of Michigan Consumer Sentiment Survey indicated that Americans expect inflation to fall over the coming year and over the longer term. That\u2019s important because there is a psychological aspect to inflation. When people expect inflation to rise, they spend more, which can push inflation higher.<\/p>\n\n\n\n
If inflation is trending lower, then it gives weight to the opinion of investors who are optimistic the Fed will reverse course this year.<\/p>\n\n\n\n
Will rate hikes continue or pause? Amid persistent inflation, the Federal Reserve delivered the message that rates might go higher than expected and stay there longer than expected. Then three banks failed, and speculation that the Fed would slow the pace of rate increases began. \u201cThe challenge for the Fed is figuring out how to buttress banks and cool inflation at the same time, without triggering a recession,\u201d reported Megan Cassella of Barron\u2019s.<\/p>\n\n\n\n
The Fed raised rates in March, despite turmoil in the banking sector. Treasury yields fell across much of the yield curve following the rate hike. Yields moved higher last week, which suggests that bond investors may anticipate further rate hikes.<\/p>\n\n\n\n
While many investors appear to be optimistic that the Fed will take a breather on rate hikes, Fed projections suggest it will continue to raise rates in 2023, although it may ease in 2024.<\/p>\n\n\n\n
Are we headed for a recession? It\u2019s a question that economists and analysts have been trying to answer for more than a year as central banks in the U.S., Europe, and elsewhere raised rates aggressively. Last week, Bloomberg\u2019s survey of economists found the probability of a recession over the next 12 months was 65 percent, up from 60 percent in February.<\/p>\n\n\n\n
\u201cAfter the Fed last week raised rates a quarter percentage point to the highest since 2007, economists worry not only about the impact on demand but the effect on the banking system\u2026Financial institutions risk becoming more guarded in their lending approach, restricting access to capital needed by businesses to expand and consumers to buy homes, cars and other big-ticket items,\u201d reported Augusta Saraiva and Kyungjin Yoo of Bloomberg.<\/p>\n\n\n\n
While the odds of recession crept higher last week, not everyone agrees that a recession is ahead.<\/p>\n\n\n\n
Is the economy weakening or strengthening? We\u2019ve seen strong jobs growth, yet the unemployment rate has risen as labor force participation increased. In addition, business activity was up sharply in March 2023.<\/p>\n\n\n\n
\u201cU.S. companies signaled a renewed expansion in business activity in March\u2026Output grew at a solid pace that was the fastest since May 2022 as demand conditions improved and new order growth returned. Manufacturers and service providers alike registered upturns in output, with service sector firms driving the increase,\u201d reported the S&P Global Flash US Composite PMI\u2122 report.<\/p>\n\n\n\n
The economic tea leaves have not provided a definitive answer about the strength and direction of the economy.<\/p>\n\n\n\n
Despite all of the uncertainty, stock investors were optimistic last week, and major U.S. stock indices rose, reported Nicholas Jasinski of Barron\u2019s. The Treasury market headed in the other direction as rates across most maturities of Treasuries rose and bond prices fell.<\/p>\n\n\n\n
In a pushmi-pullyu market, it\u2019s important to stay focused on your long-term financial goals. Basic principles of investing such as asset allocation, diversification and portfolio rebalancing remain sound. If you are feeling unsettled by market volatility, get in touch. We can review your goals and allocations to make sure they\u2019re aligned.<\/p>\n\n\n\n