April 2023 Economic Commentary

Investors have enjoyed a more stable market environment thus far in 2023 compared to the previous 15 months. As of the close of business on April 19th, 2023, the S&P 500 is up 8.02% year to date [1]. Bonds have also delivered positive results, with the U.S. Aggregate Bond Index up 2.48% year to date [2]. This is particularly reassuring in light of the two sizeable U.S. bank failures that occurred in March- Signature Bank and Silicon Valley Bank. These failures reignited concerns of a second recession emerging after the 2020 Covid recession. Additionally, many fear that small and medium sized banks will be forced to decrease lending in an already fragile environment. This is important as these banks account for roughly 50% of U.S. commercial and industrial lending, 60% of residential real estate lending and 45% of consumer lending [3]. So, if the expectation is a recession, why are the stock and bond markets up year to date? Inflation remains the primary economic driver. Since hitting a peak of 9.1% in 2022, inflation has come down for eight consecutive months to 6% in February 2023 [4]. This, along with an economy that’s been weakened by the aggressive rate hike strategy of the Fed (Federal Reserve), is creating optimism that the Fed will soon pause rate hikes and or ultimately be forced to lower rates as the economy worsens.

Stocks have historically rallied after the Fed has finished raising interest rates. Going back to 1982, the S&P 500 returned an average of 19% in the 12 months after the Fed funds rate peaked [5]. In fact, the S&P 500 rose an average of 1% during all recession periods since 1945 [6]. When you consider the depth of decline during the Dot.com bubble, and the 2007-2008 financial crisis, I find myself asking, is our current situation, all things considered, as bad as those? I don’t think so, for many reasons. First, the initial estimate of median household income in the U.S. in February 2023 was $80,893 [7]. This is an increase of 60% from 2008-2009 when median household income was $50,836 [8]. Second, the unemployment rate in the U.S. is currently 3.5% as of March 2023, and was more than double this, at 7.2% in December of 2008 [9]. Third, we have endured the fastest pace of Fed rate hikes in decades, and lastly money-market funds have reached a record $5.4 trillion in assets [10] and U.S. companies were holding over $5 trillion in cash to end 2022 [11]. There is reason to believe that as things stabilize over time, portions of these cash holdings will be reinvested into our economy.

I remain steadfast in my belief that over the long term, proper diversification and aligning your portfolio to your comfort level with risk remains a prudent strategy. Time and time again, it is proven that markets cannot be timed. No one has a crystal ball. Our best strategy is to be well-diversified, across asset classes and remain optimistic and vigilant during times of fear and panic. Our companies remain some of the best in the world, providing goods and services to every corner of the earth. Our people are some of the brightest and hardest working in the world. I believe more strongly than ever in the long-term trajectory of the U.S. and global economy!