news & insights

Fed Sticks the Soft Landing but Higher Rates Rattle Markets | It was a big week last week with the FOMC meeting and the quarterly release of the Dot Plots, plus initial jobless claims fell sharply. All this rattled the rates market, moving interest rates at the short- and long-end to cycle highs, taking stocks down with the bond market. So, let’s review the FOMC meeting. We don’t believe anything new was learned. As expected, the Federal Reserve (Fed) held rates steady at 5.25% and said it will continue to reduce holdings on the Fed’s balance sheet, which is known as quantitative tightening. The Fed has consistently said “higher interest rates for longer,” and this point was driven home in the Dot Plots. The market was hoping for two rate cuts next year. What we see though is possibly one more rate hike this year of 25 basis points and maybe one rate cut next year. The real interest rate cuts expected by the Fed are not until 2025. The Dot Plot revealed the expected Fed Funds rate to be 5.6% this year, 5.1% in 2024, and 3.9% in 2025. This is what the bond and stock markets did not like, and their reaction drove both 2- and 10-year Treasury yields to cycle highs with technical breakouts. As a result, we expect 2-year Treasuries to reach the 6% area and 10-year Treasuries up to the 5% area.

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Inflation Data Comes in Hot but the Market Yawns | The Consumer Price Index for August came in at 3.7% year-to-year, slightly higher than the consensus estimate of 3.6% year-to-year. Most of the increase was due to shelter costs. But the services side of the data came in softer than expected, and this was the data point that the bond market seemed to focus on more.

Initial Jobless Claims Fall Sharply | A good leading indicator of the job market is initial jobless claims. Claims had been rising – indicating the job market was slowing – only to give this up last week when claims fell sharply and back down to levels we’ve not seen since February. The Federal Reserve (Fed) is data dependent when it comes to determining the future of higher interest rates. The initial jobless claims data point will likely not change the Fed’s view of holding rates at their next September meeting. But if this trend continues, then the market will likely begin pricing in higher rates. In addition, there are other market pressure points from the world of labor, including higher wage negotiations from UPS, the possible Auto Workers (UAW) strike, and, of course, the continued strike by 11,000 film and television writers, members of the Writers Guild of America (WGA), and the 65,000 actors in the Screen Actors Guild-American Federation of Television and Radio Artists (SAG-AFTRA). Future higher wages could be an additional pressure on future interest rates. Investors should expect “higher for longer” as the most likely scenario for the rest of the year.

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Moving Into Fall, Then to Year-End: Positioning Will Be Important | There is always the unexpected! Of all things, Taylor Swift’s Eras Tour and Beyoncé’s Renaissance Tour have added significantly to consumer spending over the past several months, resulting in stronger economic growth – this has been a shock to economists and frankly to the world. Both tours are expected to generate nearly $5 Billion each – that’s $10 Billion in consumer spending in the U.S. alone. The Atlanta Fed GDPNow model (not an official Fed forecast) is predicting 5.6% 3Q23 real GDP growth. This is growth that the Federal Reserve is likely to see as above-trend economic growth. Well, this is good for corporate profits and it’s reflected in steadily rising earnings estimates for the S&P 500. The estimated earnings growth rate now stands at 11%-12% for 2024, which is quite strong. Companies have also learned to run their businesses more efficiently, with improving margins being a highlight of 2Q23 earnings. Speaking of 2024, it’s a Presidential election year. (Can’t wait, right?) Don’t be surprised if President Biden tries to stimulate economic growth. But his recent legislation already increases spending, which will begin to kick into high gear in 2024-2026. The Fed is expected to be on hold with interest rates but stressing higher for longer. The Fed is data dependent, and if the economic data is as expected or softer, then a hold on interest rates is what we’ll get. But if the data shows any signs of inflation or even risk to inflation, then the Fed is likely to raise rates again. Fed Chair Jerome Powell closed his Jackson Hole comments with his consistent theme of “Keeping At It” —a nod to the book title of former Fed Chair Paul Volcker, the crusher of inflation in the early 1980s. This indicates that Chair Powell is committed to also crushing inflation and will do what is necessary to accomplish this task.

In the August edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams digests the month’s economic data with headlines that include Fitch Ratings downgrading the sovereign credit rating of the U.S. to AA+ from AAA and consumer confidence falling due to rising prices, namely groceries and gasoline, erasing back-to-back increases in June and July.

Inflation Steady, Jobs Data Weakening But Manufacturing Strong - Stocks and Bonds Flip Flop | Last week, the Federal Reserve’s favorite inflation gauge – the Core Price Consumption Expenditure (PCE) – came in line with expectations, but it does remain elevated. JOLTS (the job openings and labor turnover survey) and employment data came in softer than expected, indicating early signs of a weakening employment picture. The important number was the unemployment rate rising to 3.8% from an expected 3.5%. Payrolls did come in stronger than expected, though wages were lower. But then manufacturing data showed strength. Both stocks and bonds had responded positively, then flipped to negative on manufacturing data. The market still expects that the Fed to be on hold with interest rates for September. But the question remains open for whether the Fed will raise interest rates again at their subsequent meeting (Oct. 31-Nov. 1). As of now, the market is not expecting a rate hike in November.

Jackson Hole Commentary: Hawkish Powell Ready to Ruffle Feathers | Federal Reserve Chair Jerome Powell’s speech from Jackson Hole last Friday did not have any sign that interest rates would be coming down any time soon. In our view, the bias in his speech was clearly hawkish. He ended where he began at last year’s meeting, “We will keep at it until the job is done.” This is a nod to former Fed Chair Paul Volker and the title of his book, Keeping At It. The Fed has been extremely transparent on where it stands on monetary policy and has delivered on its promises to fight inflation with rates rising the fastest in history, from 0% to 5.25%. What we take away from Fed Chair Powell’s speech is that if the data does not support a slowdown in inflation, the Fed will not hesitate to continue to raise rates. Powell said, “We intend to hold policy at a restrictive level until we are confident inflation is moving down.” The risk here is rates on both the front-end and back-end of the yield curve remain elevated and can move higher. With the short-end above 5% and the long-end looking to push up into the 5% area pressure on equities will continue, especially since stocks are priced rich with a price-earnings ratio at 20x.

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Markets Oversold Short-Term But Still Overbought Medium-Term: Expect Volatility | In a week jam-packed with data and news, it’s important we keep an eye on the big picture. As we have been writing, the equity market has entered a seasonal correction after extraordinary gains of 15% on the S&P 500 and 30% on Nasdaq. Corrections refresh a market but can be unsettling. It is normal to correct one-third to one-half of a move, therefore we have been expecting a 5%-10% pullback on the S&P 500 and 10%-16% on Nasdaq. As of Friday’s close, the S&P 500 is down 5.2% and Nasdaq is down 8.0%. Short-term, the market is very oversold, but on the medium-term, it’s overbought. This could lead to a very choppy (up and down) style market. Looking at the McClennan Oscillator, an indicator of market breadth, we see more evidence that the market is oversold near-term. A brief rally can occur, but we still don’t have signs that a bottom is in place. We are buyers of this dip.

Equity markets have entered a seasonal correction that typically lasts into the fall months with important market bottoms often reached in the month of October. Earnings estimate revisions, which are one of the best predictors of stock prices, are seeing estimates rise. This gives us confidence that this is a correction within a bull market. However, continued higher interest rates will be a challenge for the market. Long Treasury bond yields appear to be breaking to the upside, which could track rates to the 5% area. This will attract investors away from equities to bonds and even to cash. Potential strong buyers of bonds are retired investors who would welcome a guaranteed interest income of 5%. If rates do rise, it will keep pressure on both the bond market and the equity market.

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Inflation Data Bullish But Bond Yields Still Look to Firm | Last week, Consumer (CPI) and Producer (PPI) Price indexes were released for the month of July with CPI coming in better-than-expected year-to-year at 3.2% (vs. expected 3.3%) and PPI coming in stronger than expected year-to-year at 0.8% (vs. expected 0.7%). There has been more downward progress on producer prices than on consumer prices. Overall inflation data looks to have peaked. In examining the patterns of historical inflation, the pattern of CPI appears – in our view – to be similar to the 1950s and not the 1970s. If this is correct, prices should continue to go down over time – which would allow the Fed to eventually pause on raising interest rates. However, a strong employment market may pressure the Fed to still raise rates. The next rate decision won’t happen until September (Federal Open Market Committee, or FOMC, meeting will be held on September 19-20.) However, the market will be paying close attention to the comments coming from the annual Jackson Hole Fed meeting taking place on August 24-26.

The Investment Council Report (ICR) provides a brief overview of the Council's perspectives of the economy and the major asset classes: equities, fixed income, and alternatives.

In the July edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams breaks down the month’s economic data, which showed consumer confidence rose to its highest level since July 2021, the Consumer Price Index (CPI) figures increased 3 percent over the last year, and a decline in the unemployment rate back to 3.5 percent pointed to continued tightness in labor market conditions.

Jobs And Wages Point To A Strong Economy | Last Friday, we received July employment data which does not show a slowdown in the economy. Although non-farm payrolls and private payrolls came in slightly below expectations, wages came in at 4.4% year-over-year, stronger than the expected 4.2%. A surprise was a drop in the unemployment rate to 3.5% (3.6% was expected). Continued good employment data and especially strong wages mean the consumer still has buying power to keep the economy growing. The Federal Reserve and several Wall Street economists are now calling for a soft landing in the economy, removing their forecasts for a recession this year. (See note about Bank of America’s reversal later in this commentary.) Corporate earnings for 2Q23 are also not as weak as originally feared. So, overall, the backdrop for equities is positive, but a break from the strong gains looks to be going on vacation.

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The Bull Is Running But Expect Pullbacks | Equities are in a bull market, but stocks have become very overbought. Pullbacks of 5%-10% are normal and can be expected. Seasonal weakness begins in September-October, with November beginning a strong seasonal year-end rally. We still anticipate a strong year, especially as the breadth of the market is expanding. This month, Small Caps joined the rally.

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You Can Bank On The Banks – 2Q Earnings Season Starts On A Positive Note | A great start to Earnings Season with JP Morgan (JPM), Wells Fargo (WFC) and Citi (C) reporting 2Q earnings better than what the Street was expecting. Bank stocks rallied early in the trading day but sold off by the close – except for JPM. Bank stocks are in a trading range and still face major upside resistance. Technically the best positioned stock of the group is JPM. The bigger banks will fare better, but overall Banks as a sector still appears to be a Value Trap. The benefit to Banks is “clipping a dividend.” We would stay with the large banks. At this very early stage, the second quarter earnings season for the S&P 500 is off to a strong start, according to FactSet. Both the number of positive earnings surprises and the magnitude of these earnings surprises are above their 10-year averages. A stronger earnings season would support the recent rally in the equity markets. Something to keep in mind: July is typically a well-performing month, leading up to markets having a peak in August, which in turn sets up seasonal weakness in September and October. We continue to believe that the second half of the year will be choppy, but we expect to end the year on a strong positive note.

In the June edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams breaks down the month’s economic reports which saw U.S. gross domestic product revised up to a 2% annualized increase in the first quarter, according to the U.S. Commerce Department. The government’s third estimate of GDP for the period reflected upward revisions to exports and consumer spending, while household spending, the engine of the U.S. economy, rose at a 4.2% pace — the strongest in nearly two years — as services outlays were adjusted higher. Meanwhile, key inflation gauges watched closely by the Federal Reserve were revised down slightly.

The first half of 2023 had spectacular returns that were not expected as we came into the year. The consensus view was that the first half of the year would not be good for markets – but the second half would be better. So having the S&P 500 up nearly 16% and Nasdaq over 30% through the end of June is almost shocking – especially given the record speed with which the Fed hiked interest rates from 0% to 5%. The manufacturing area of the economy has been negatively impacted by higher interest rates and has been for a while. However, the consumer has remained a spender, keeping the services part of the economy strong. Looking at the Conference Board Consumer Confidence Index shows the consumer is still optimistic. An optimistic consumer spends money – a good sign for the services side of the economy. Why are consumers still spending? Because the unemployment rate remains historically low at 3.6%. But recently there’s been some weakening in the jobs data with initial jobless claims rising, payrolls coming in below expectations, and JOLTS falling (that’s the Job Openings and Labor Turnover Survey). For now there is enough of a runway for consumers to still be spending, but they are becoming more selective in what they purchase.

Last Friday’s job report came in softer than expected as cracks continue to show in the labor market. Reminder: this is what the Federal Reserve is looking for to slow down the economy, which would slow down inflation. Non-farm and private payrolls came in below expectations and revisions to the previous month came down. The employment rate remains low, coming in at 3.6%, down from 3.7%. Average hourly wages remain sticky at 4.4% growth year-on-year, BUT wages have been falling. As we have been highlighting recently, initial jobless claims are also showing cracks with higher claims being reported. And yes, it’s true that the Fed wants and needs more weakening in the job market, but overall, these reports are positive for interest rates and the stock market.

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Core Price Consumption Expenditure (PCE) Year-over-Year Ticks Down Slightly | Last Friday, the year-over-year Core PCE data came in slightly below expectations at 4.6% (vs. 4.7%). This inflation gauge – the Federal Reserve’s favorite – remains elevated and above the Fed’s goal of 2%, but it is slowly falling. This data should support the Fed continuing its rate hikes in July; we believe you can expect a 25-basis point bump. Meanwhile, the equity market is rallying on the data because they’re focused on the end of the rate cycle coming. Given the recent stronger economic data and still elevated inflation, bonds are holding rates high. We still believe rates are in a peaking process.

The Big Short in Housing: Last week, housing data came out surprisingly strong with both housing starts and permits coming in above expectations – an indication that housing remains strong. This is evident within the market when you see S&P 500 Homebuilding stocks breaking out to record all-time highs. This industry group is very sensitive to both the economy and interest rates. So, why is this industry so strong? It’s Economics 101: short supply and strong demand equals higher prices. The supply of housing remains low relative to the demand. The current housing shortage in the U.S. has been impacted by several issues, including the pandemic, inflation and increased interest rates. Furthermore, new home construction dropped precipitously after the Great Recession (late 2007-2009) and has yet to fully recover. But essentially, this is a problem of supply and demand as many millennials are now looking to move from renting to buying, and the insufficient housing supply is driving up prices and overall robust health for the industry.

Peak Inflation, Peak Rates, Earnings Improving, Bearish Positioning = Markets Higher | Last week, both the Consumer Price Index (CPI) and the Producer Price Index (PPI) came in softer than expected. After 10 consecutive rate hikes, the Federal Reserve decided to pause this month and not raise rates again BUT with the caveat that they are likely not done raising rates. The Fed did say they remain “data dependent” month to month. While the market is already pricing in an additional 25-basis point rate hike in July, it is really looking beyond these actions, believing that we are coming to the end of the higher rate cycle. What’s fueling this belief? In part: all the positive earnings estimates we’re seeing. Global markets have also gotten excited and rallied because China is stimulating its economy by cutting rates. Why? Its economy is not recovering as expected and remains weak.

This month, we had Consumer Prices (CPI) and Producer Prices (PPI) come in below expectations right before the Federal Reserve’s decision on interest rates. The Fed elected to go on pause after raising interest rates 10 times consecutively. The pause was mostly expected, but the surprise was the fact that half of the Federal Open Market Committee (FOMC) members expect that rates still need to go up further – possibly twice more with a target terminal rate of 5.6%. Their concern is founded in the ongoing strength of the labor market. But the Fed said they remain data-dependent, meeting to meeting. In addition, they are not forecasting a recession but more of a soft landing this year and next. As we know, 2024 is a Presidential election year and recessions typically don’t happen during this time frame. Our outlook still remains positive on markets and we’re looking for the equity market to rally into the summer but there could be brief corrections. We still anticipate a peaking in interest rates. Investors should maintain a balanced and quality portfolio given the concentration risk within the equity market.

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In the May edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams provides analysis of the month’s economic reporting. According to the Commerce Department, the U.S. economy grew at a lackluster 1.3% annual rate from January through March as businesses wary of an economic slowdown trimmed their inventories. Despite the first-quarter slowdown, consumer spending, which accounts for around 70% of America’s economic output, rose at a 3.8% annual pace, the most in nearly two years and an encouraging sign of household confidence.

The Phoenix Rises | Last week, the S&P 500 reached a 20% gain from the October low and it’s the first time the bull has arrived when a recession was forecast to be on the horizon, ending the longest bear market since 1948. According to Bank of America, after crossing the 20% mark from the bottom, the S&P 500 continued to rise over the next 12-months 92% of the time, returning 19% on average back to 1950. The message is that the markets are still in a secular bull market. This indicates the market can reach new record highs.

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Debt Ceiling Resolved and Jobs Report Mixed. The Bull is Ready to Run. The hand-wringing over the debt ceiling has been resolved (sigh of relief), so with that market distraction sidelined, let’s talk about J-O-B-S. Last Friday, the May Jobs report came out with a surge in both nonfarm and private payrolls, but the unemployment rate rose sharply and was the biggest monthly gain since April of 2020 (see chart and table below). The equity markets took the data as bullish, and we now have a confirmed breakout not only in the Nasdaq 100, but the S&P 500 and Russell 2000 (small caps) have also joined the breakout club. Meanwhile, market sentiment is mixed on what the Fed’s next move on interest rates will be: some are counting on a pause and some are anticipating further rate hikes. The lack of clarity on the Fed’s path may cause periods of volatility.

A Debt Ceiling Deal is on the Table | Early in the holiday weekend, Congress and President Biden came to an agreement on the Debt Ceiling while the X date was pushed out to June 5. In atypical fashion, equity markets rallied in May and into the Debt Ceiling negotiations with the S&P 500 rising 1.8% and the Nasdaq 100 surging 13% this month. Now the markets can focus on the fundamentals.

Impasse On The Debt Ceiling Appears To Be Cracking - A path to resolving the debt ceiling debate appears to be within sight. A quick review of how the market and various sectors behaved during debt ceiling crises shows poor performance during negotiations – but once a deal is struck, markets recover. Granted, in 2011, there was the debt downgrade after the resolution of the debt ceiling and markets did decline more – but a bottom and a recovery did occur. Today, it’s all a bit different. Frankly it’s atypical to have markets rallying in the hopes of a resolution. This is the unexpected but happy surprise we’re seeing with the Nasdaq, where the FANG+ Mega Cap tech-related stocks are leading the charge higher. But expect volatility until a deal is done.

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Positive Inflation Data: But the Debt Ceiling is the Wall of Worry for the Markets Last week two positive reports on inflation were released with both CPI (Consumer Price Index) and PPI (Producer Price Index) data coming in slightly lower than expected. We remain in the camp that inflation has peaked – however – the data can be choppy, meaning the numbers may zig up and zig down. But overall, we believe the result is a downtrend. So how did the markets react to the positive reports?

In the April edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams analyzes the month’s economic data as the Federal Reserve continues to seek to reduce inflation without unnecessarily deepening the economic slowdown.

There is an old adage on Wall Street: Sell in May and Go Away – meaning the returns for the rest of the year will be muted. Why would they say this? Because most of the returns that are generated in the market tend to happen toward the end of the year. But no model has shown that this is a long-term strategy that beats the market. What it does say is volatility will be present. The theme we have had this year is that the markets would have volatility and we see no reason to change this view. The equity market is very divided in what is working and what is not working; meanwhile the bond market is challenged with pricing in an a debt ceiling debate, strong employment, economic slow down and a banking crisis.

Employment and Wages Still Strong: Last Friday, the April jobs report was released and the report came in stronger than expectations – both non-farm and private payrolls were up sharply versus expectations, but for the previous month, both of those data points were revised down. The unemployment rate fell to 3.4% from 3.6% and wages rose year-on-year 4.4% from an expected 4.2%. Net net, the jobs report was bullish for the economy and bearish for the Fed. This is not the kind of report the Fed wants to see while fighting inflation. The stock market reacted favorably while interest rates rose – two actions that we believe were justified.

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Last week, the Federal Reserve’s favorite inflation data, the Price Consumption Expenditures Deflator (PCE Deflator) came in slightly higher than expected year over year (4.2% versus expected 4.1%) and so did the Employment Cost Index (1.2% versus 1.1%). These reports show that inflation remains sticky and therefore support an interest rate hike this week; we expect another 25-bps bump by the Fed on May 3. On the flip side, the stock market did like the softer 1Q 2023 GDP annualized number coming in much softer than expected at 1.1% versus expected 1.9% -- which favors lower interest rates later in the year. So, the economic data had something for the bulls and something for the bears.

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Cracks Now Showing in Employment Data - Initial jobless claims is a weekly economic data series released on Thursday mornings that serve as a leading indicator of the direction of employment and one that we have been following very closely. This data is finally showing cracks as claims have been rising and staying elevated. The Federal Reserve is expected to raise interest rates for the tenth time by 25 basis points when it meets on May 2-3. The Fed may then pause its parade of rate hikes – which began just over a year ago – to look for the impact of its actions, as revealed by incoming data on inflation and employment.

Something for the Bulls, Something for the Bears. Let’s do a review of recent important data releases. The Federal Reserve Open Market Committee minutes acknowledged for the first time that there is risk of a recession later this year based on the expected credit contraction resulting from the recent bank failures. There were also two important data releases on inflation. Both the Consumer Price Index (CPI) and the Producer Price Index (PPI) were released with each posting better than expected inflation data. Then the official start of earnings season kicked off with three major banks reporting earnings much better than expected.

The Federal Reserve has raised interest rates nine consecutive times which triggered a banking crisis and two US banks were taken over by regulators. Meanwhile, there was a forced bank merger in Europe with Credit Suisse being consumed by UBS Group. One would think stocks would be down sharply given this backdrop, but in fact they have since rallied. Confidence was restored for U.S. deposit holders in part by the Fed’s infusion of capital through a loan facility for the banks, which served to increase liquidity on the Fed’s balance sheet. This liquidity supported risk assets, allowing stocks to rally. Also fueling the rally is the drop in interest rates at the short and long ends of the yield curve.

In the March edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams reviews the month’s economic data released against the backdrop of the regional banking crisis.

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First quarter 2023 is in the books with the S&P 500 up 7% and the Nasdaq Composite up nearly 17%. Nasdaq had its best quarter since 2020. To be up in this environment is simply amazing when you consider that the Federal Reserve has raised interest rates nine times in a row – and will continue to do so as the terminal rate is now targeted at 5.125%. Plus, the higher rates have finally shown the cracks in the system with a run on regional banks and two of them needing to be taken over by regulators. But here we are. So, this week we look at how or why this situation became possible.

The Investment Council Report (ICR) provides a brief overview of the Council's perspectives of the economy and the major asset classes: equities, fixed income, and alternatives.

Last week, the Fed raised interest rates by 25 basis points, as expected, which is the ninth rate hike in its ongoing fight against inflation. The Fed is maintaining its terminal rate projection of 5.125%, leaving the window open for another rate hike of 25 bps. (Next Fed meeting is set for May 2-3). In announcing the hike, the Fed did acknowledge the recent disruptions in the U.S. banking system – which it expects to cause tightened credit conditions for households and businesses, something that could weigh on economic growth. Fed Chair Powell said: “Such a tightening in financial conditions would work in the same direction as rate tightening. You can think of it as being the equivalent of a rate hike or perhaps more than that.” When he began his press conference, Powell addressed what was happening in the banking system and he clearly stated that the U.S. banking system is sound and resilient with strong capital and liquidity. U.S. Treasury Secretary Janet Yellen said last week that regulators are prepared to take additional steps to guard bank deposits if warranted. Monday morning, it was announced that First Citizens Bancshares Inc. (FCNCA) would buy Silicon Valley Bank’s (SVB) deposits and loans from the FDIC, with $90 billion to remain in receivership. While this is a positive for the regional banking crisis, a solution for First Republic (FRC) bank is still needed. We may see banks rally on the back of this news, but the risk is that they remain under pressure until the banking disruption is fully resolved.

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The U.S. economy expanded at a 2.7% annual rate from October through December, a solid showing despite rising interest rates and elevated inflation. The government had previously estimated that the economy grew at a 2.9% annual rate last quarter. The report revised down the government's estimate of consumer spending growth in the October-December quarter, from a 2.1% rate to 1.4%. That was the weakest such showing since the first quarter of last year. Business spending also slowed in the fourth quarter, suggesting that the economy lost momentum at the end of 2022.

One would not have expected the equity markets to actually rally amid a U.S. banking crisis – but because stocks are so oversold on a short-term basis and measures have been taken to help fix this crisis, a rally did indeed begin last week. As long as the banking crisis sparked by the SVB collapse continues and the Federal Reserve continues to raise interest rates, the markets will remain volatile. This Wednesday (3/22), all eyes will be on the rate decision by the Federal Open Market Committee (FOMC) as well as their comments on the future direction of interest rates. As of this writing, expectations in the market are split between a 25-basis point hike and a pause. Looking ahead, the market is pricing in rate cuts of up to 100 basis points. We have been here before, where the market expects future rate cuts only to have the Fed squash those expectations. This is a risk to the volatility of the markets. Read on.

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We are providing this information in light of recent market volatility sparked by news related to Silicon Valley Bank (SVB). We know that situations like this can be unsettling and raise questions about the safety and security of your investments. We want you to know that we take your trust in us very seriously and are dedicated to keeping your assets safe and secure. That being said, we'd like to take a moment to explain why you can trust us, and those we choose to partner with, to protect your assets and feel confident about your investments.

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As we near the Ides of March, there are widespread concerns that cracks are beginning to show in the U.S. financial system. But are we facing a historic turning point? We believe no. Last Thursday, concerns emerged on the credit risk of Silicon Valley Bank (SVB), and fear of a run on that bank spread like a contagion to other banks, particularly to the regional banks. This wave came on the heels of fears caused by the voluntary shutdown of Silvergate Bank, operated by Silvergate Capital Bank (SI), which was heavily leveraged to the crypto market. Higher interest rates now appear to be having an impact on a select area of the financial system. We must emphasize that the major commercial banks are heavily regulated and monitored and are required to have a solid capital base that satisfies Federal Reserve stress tests. These banks also have a more diversified business mix (unlike SVB and Silvergate). But these banks’ stocks were hit last Thursday and Friday in sympathy. The regional banks have broken down technically, indicating the likelihood these stocks are going to remain under pressure. The big banks are also under pressure – but not as bad as the regionals. The silver lining of last week’s action was a positive diversification created by a flight to safety as the Treasury market saw rates falling on both the short and long ends. This is a time for patience not panic as deposits are safe with the Fed backstopping this banking crisis. Historically, when policy makers begin to panic you are near the lows of the market. But do expect volatility to continue as the market digests what all this means. Read on.

Equity markets through the month of February have been consolidating the strong rally that emerged at the start of the year. Near term, there are oversold readings with the S&P 500 holding its 200-day moving average (3940, as of March 3) – at least so far. Turning to market breadth, the McClennan Oscillator, which measures momentum in market breadth similar to the MACD (moving average convergence/divergence), reached levels that historically have seen equity markets rally. Meanwhile, volatility measured by the VIX index is falling. This data points to a market that can rally or at least remain in a trading range. Many market participants are confused as to why the market has not fallen more, considering that interest rates are now expected to reach and possible exceed 5%. The likely reason is that, back in December, most sentiment surveys showed an extremely bearish bias with investment positions very defensive, including investors stockpiling mountains of cash. When most investors are positioned the same, the opposite generally happens. Note: sentiment indicators are contrarian by their nature.

March should prove to be an exciting month for the markets as it will be data-heavy with employment and inflation updates set to be released around the Ides of March. The next employment report will be on Friday, March 10, followed by CPI data on March 14 and PPI and Retail sales data on March 15 we get PPI and Retail sales. Each of these datasets will “betray” what’s happening with inflation – and we know that the Fed will be watching in the wings, anticipating its next move. Et tu, Mr. Powell?

Last Friday, one of the Fed’s favorite measures of inflation, the PCE Core Price Deflator, came in hotter (4.7%) than expected (4.3%) – and the data had already been revised the previous month higher to 4.6% from 4.4%. So, this report was in line with the trend we just saw with the overheated CPI and PPI numbers. Data does not trend in one straight line so occasional upticks in inflation should be expected. This data will keep the Fed on the same course of raising interest rates as expected. The Terminal Rate is now expected to be 5.3%-5.5%. But examining the chart of PCE (below), it still looks like the data is peaking. Importantly, as long as interest rates are going up, markets will remain volatile.

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Despite the long weekend, folks are still thinking about last week’s surprisingly strong data: the numbers for the Consumer Price Index (CPI), the Producer Price Index (PPI), and retail sales all came in higher than expected. But let’s take a step back for a minute. The first thing we need to keep in mind is that the equity markets were overbought after a very strong rally in January. We had said to expect a pullback. Well, the pullback is here. And it’s been a controlled pullback – the markets didn’t really sell off too much.

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So far, the Federal Reserve has been true to its word: as long as employment data is strong, the Fed’s actions will remain restrictive. Is the data strong? Right now there are 11 million job openings – near record highs! The concern is that there are not enough employees to fill the jobs that are open. The concern is that this could put upward pressure on wages, keeping inflation elevated. Fed Chair Powell did acknowledge that the Fed would now be data-dependent (just as we’ve previously said they were!). And what data will the Fed care about? This week’s CPI report for a start – which will also be important for the bond and stocks markets.

As markets remained in a tug of war with the Federal Reserve, Managing Director and Head of Advisor Solutions Richard Williams analyzes the month’s economic reporting in the January edition of the Chart Book, which highlights a slowdown in housing, retail and manufacturing amid a stubbornly tight labor market.

We retain our thesis that the Bull is already running – and we offer a slew of charts as evidence. But that doesn’t mean we’re ignoring the expectations for two additional rate hikes or the distraction that is the debt ceiling. Yet the market may already be pricing in these hurdles, as economists have begun to revise their forecasts, and a portrait of market resilience is now overshadowing the dread of a recession.

The Longo Group's annual presentation reviewing the market.

When the Fed hiked its interest rate 25 bps last week, it was completely in line with long-held expectations. But what got a reaction was the message – and tone – used in the announcement.

The Investment Council Report (ICR) provides a brief overview of the Council's perspectives of the economy and the major asset classes: equities, fixed income, and alternatives.

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Wall Street has an old adage: “As goes January, so goes the year” – which means that: if the January return in the equity market is positive, the full year will be positive, but if the month is negative, expect a negative return on the year. Need proof? Just look at 2022.

View the Tax Contribution Guide for key data on tax contributions.

As last week’s earnings and market data was mixed – delivering good news and bad news – the S&P 500 continues to test resistance at 4000 level despite the recent improvement in market breadth (i.e., the number of stocks advancing relative to those that are declining). What was that mixed bag of news?

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Last week’s CPI report came in as expected and the markets cheered. Although the level is still elevated at 6.5%, on a year-to-year basis, it does appear that CPI has peaked. As a result, markets will focus on the future direction of inflation, and we see that the bond market is already voting that inflation will be coming down.

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The Best Strategy for 2023 will be Dollar Cost Averaging.

In the December edition of the Chart Book, Managing Director and Head of Advisor Solutions Richard Williams breaks down the month’s economic data to close out 2022. Highlights included an increase in consumer spending which coincided with weakening in manufacturing and housing indicators.

Markets continue to struggle as employment data remains strong – a tenacious trend that gives the Fed agita.

Last year is now in the history books and will be remembered (not fondly) for its Bear market in both stocks and bonds and the Fed’s warpath approach to fighting inflation by taking the Fed Funds rate from the zero-bound to 4.50%. Markets responded – as they should – by going down, down, down.

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Sanctuary Founder and CEO Jim Dickson sits down with Chief Investment Strategist Mary Ann Bartels for a candid conversation about what we can anticipate in 2023.

The Year Ahead Outlook 2023 Report provides a deep dive into the economic forecast and is an easy to digest overview .