Asset Management
03/27/2023 Market Strategy
March 27, 2023
There’s No Free Lunch
No matter how prudent a Fed fund hike cycle, it’s never an easy process for markets to digest
Key Takeaways
- Equity markets stateside last week showed resilience even as the Fed raised its benchmark rate for a ninth time since the start of Q2:2022 and issues around several troubled US regional banks remained in flux.
- The Nasdaq Composite index delivered the best performance among US equity indexes last week as technology and tech-related stocks led the broad market higher on expectations that possible slower economic growth will continue to attract investors to growth segments among stocks.
- Bonds rallied last week on expectations that the Fed might pause its rate hike regime in light of the likely economic drag caused by the crisis of confidence experienced among the regional banks.
- Existing home sales rose 14% to a 4.58 million annualized rate in February 2023 from the prior month, but were 22.6% below the sales levels a year earlier.
Stocks bounced between gains and losses last week as the Federal Reserve raised its benchmark rate for a ninth time since the start of the second quarter of 2022. Bank-specific issues stateside and in Europe throughout the week added levels of angst to the market landscape as traders considered the risks and opportunities that surfaced.
The Dow Jones Industrial average, the S&P 500, the S&P 400 (Midcaps), the S&P 600 (small Caps), the Russell 2000 (small caps) and the NASDAQ Composite (some 40% weighted in tech and tech related stocks) ended the week respectively higher up 1.2%, 1.39%, 1.25%, 0.56%, 0.52% and 1.66%.
The NASDAQ delivered the best performance as investors bid growth stocks higher on expectations of economic slowing while the mid cap and small cap indices relatively underperformed the large caps. The mid and small cap indexes’ exposures to regional banks and the smaller companies that borrow from them curbed much enthusiasm for those spaces.
In our view the Federal Reserve is unlikely to pause or pivot as soon as some market participants and commentators would like to see.
For a large part of the week investors were reminded that when it comes to Fed funds hike cycles “the medicine” never goes down easy. More than a decade of easy money and a period of “free money” add angst and risk as well as opportunity to the mix this cycle for traders and investors to parse.
From March 8, the day before the crisis of confidence in banks captured the newswires, five of the aforementioned indices are off: 1.71%, 0.53%, 7.05%, 7.4% and 7.7%. Of the six indices only the NASDAQ Composite was higher in the period (up 2.14%) as expectations of slower growth and lower interest rates indicated by rising bond market prices sparked investor appetite for technology and other growth stocks.
“Shoes” that already have dropped in the form of regional banks that have failed and caused the regulators to step in are considered to be likely catalysts for increased regulation as well as curtailed lending by banks that could help slow inflation near term giving the Fed some space in how much and for how long it will need to keep raising its benchmark rate. The concern is that any sluggishness to hit the economy as collateral damage from the banks’ crisis of confidence could also cause the Fed to slow its hiking process or even pause too soon.
Such action could end the battle against inflation too early—reigniting speculation and risk a resurgence of inflation. The effect could be something akin to a camper not taking care to extinguish the embers of their fire before leaving a camp that was covered in dry leaves and kindling wood.
Look for the Signal—Not the Noise
Last week reminded us of the age old admonishment in times like these to “separate the signal from the noise” in order to avoid missing the forest for the trees.
We expect this week to find traders and investors keeping close tabs on any developments around the banking crisis of confidence as well as keeping an eye on a sizeable brace of key stateside economic data that will be released this week.
In our view the Federal Reserve is unlikely to pause or pivot as soon as some market participants and commentators would like to see. The Federal Reserve appears to us rightfully adamant about remaining focused on its efforts to get inflation in check.
That said we persist in believing that the Fed will work to maintain a level of sensitivity in its efforts to curb untoward levels of inflation to avoid a hard landing for the US economy. So far the resilience evidenced in US economic data suggests the Fed’s efforts against sticky inflation have not been too heavy handed as inflation (while stubbornly sticky) has begun to show signs of moving lower.
Disciplines of portfolio diversification and the practice of patience by investors are required in our view to navigate the current set of challenges effectively.
Name:
John Stoltzfus
Title:Chief Investment Strategist, Oppenheimer Asset Management Inc.
John is one of the most popular faces around Oppenheimer: our clients have come to rely on his market recaps for timely analysis and a confident viewpoint on the road forward. He frequently lends his expertise to CNBC, Bloomberg, Fox Business, and other notable networks.
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