Written by: Benjamin Bimson CIMA®, CMT® / CIO, Trek Financial
As regional bank pressure persists with the latest failure of First Republic Bank, and nearly a month and a half after the failure of Silicone Valley Bank, markets seemed to be struggling regarding what happens next. In a review, the Federal Reserve noted that the failure of Silicon Valley Bank was a result of poor management and supervision. It appears from the report, that risks may not be broad-based at this point in time and therefore many are taking a closer look at the economy, inflation, and the Fed more so than the regional banking failures.1
The timing of this is key as many investors are wondering about what happens next for markets and the greater economy.
Last couple of weeks had a few data points that are of interest in gathering evidence of where we are and where we may be headed next.
- The Federal Reserve hiked rates 0.25% on May 3, 2023, but indicated that future rate hike are going to depend on economic and credit conditions. Furthermore, they are remaining highly attentive to inflation risks.2
- GDP (Gross Domestic Product) saw an increase of 1.1% in the first quarter, showing that the economy has significantly slowed down since the 4th quarter of 2022.3
- PCE (Personal consumption expenditure) increased less than 0.1% in March, showing that spending is still growing, and inflation is not yet motivating the majority of households to reduce consumption.4
What does all of this mean? This is confirmation that the economy is slowing down, inflation is not yet over, and we are all looking at what the Federal Reserve will do at their next meeting.
The Fed was widely expected to increase rates another quarter of a percent at the last meeting, and then potentially pause to see how the economy does with higher rates. The market further expects that after the last hike, the Fed is likely to pause, making it the final hike in this cycle.5
Historically, the stock market has struggled immediately after a final rate hike from the Federal Reserve. However, markets have also fared much better on average in the 6 to 12 months following. *
*Historical market moves following the final rate hike from the Fed.
Chart Source: Ned Davis Research Group
Inflation today is a headwind compared to final rate hikes since 1989 and therefore some uncertainty remains.
One of the favorite talking points of some market pundits has been the idea of a return to stagflation. Stagflation is “an economic phenomenon marked by persistently high inflation, high unemployment, and stagnant demand in a country’s economy.”6 This is not a good scenario for risky investment and thankfully, we are missing a key ingredient necessary for Stagflation. Namely, we have very low unemployment rates at 3.5%, which is a very low historic level.7
The likeliness of market uncertainty persisting for at least the near-term, is relatively high as investors and businesses assess what happens next in the economy.
Transitionary markets are rarely fun, but it can be a good opportunity to seriously examine your needs and goals, and to make sure that your investment strategy aligns with those accordingly. A question you may want to ask yourself is whether you would be disappointed if your avoided risk and the market went up, or if you would be disappointed that you took risk and the market went down? This is a very personal question, but one that is important to understand about yourself in times when market swings can be difficult to digest.
Sources
- https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf.
- https://www.federalreserve.gov/newsevents/pressreleases/monetary20230503a.htm.
- https://www.bea.gov/news/2023/gross-domestic-product-first-quarter-2023-advance-estimate.
- https://www.bea.gov/news/2023/personal-income-and-outlays-march-2023.
- https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html.
- https://www.investopedia.com/articles/economics/08/stagflation.asp.
- https://www.bls.gov/charts/employment-situation/civilian-unemployment-rate.htm.
Investment Advisory Services offered through Trek Financial LLC., an (SEC) Registered Investment Advisor.
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