Economic Update 3-6-2023 

• Economic data for the week was mixed again, with ISM services remaining solidly expansionary, while ISM manufacturing continued to contract (although it improved from the prior month). Durable goods orders also fell, while pending home sales surprised on the upside.
• Equities rose last week with mixed, but not terrible, economic data and earnings keeping sentiment elevated. Bonds also gained a bit as interest rates stabilized after a recent inflation-based spike. Commodities rose due to higher crude oil and natural gas prices. 

U.S. stocks rebounded last week after their worst showing in a few months, with sentiment surrounding inflation and earnings settling down a bit, and technical conditions remaining bullish. By sector, materials, energy, and industrials led the way with gains over 3%, while defensive utilities and consumer staples suffered minor declines. Real estate rose over a percent, with little change in long-term interest rates.

Several members of the Fed again called for continued higher rates in light of strong recent inflation numbers, while another remained a bit more guarded and pointed to a potential pause in hikes by summer. These comments aren’t necessarily out of nowhere, but often serve as a scripted ‘market test’ before future policy activity. Current Fed funds probabilities for the late March meeting remain at 0.25%, but chances of a 0.50% hike have risen to 30%. Expectations for Fed funds continue to run hot, with both the level of rate and duration of tight policy pushing the curve higher in recent weeks. (For example, the highest probability outcome for the December 2023 Fed funds midpoint has moved from 4.625% at year-end to 5.375% by Friday.)

Earnings for Q4 are close to wrapping up, with over 90% of S&P 500 companies having reported (per FactSet). The year-over-year decline remains around -5%, with expectations for a similar pace in Q1. Q2 and Q3 remain a bit of a mixed bag, as full-year 2023 estimates remain close to 0% growth, with slowdown risks high (whether or not a recession happens alongside). The forward P/E for the index remains around 17.5x, a bit lower than the 5-year average, but right around the 10-year average.

Foreign stocks fared well last week, with a weaker dollar, but also more positive economic news out of Europe. This was despite inflation pressure remaining high, and ECB rhetoric hinting toward another 0.50% hike at the upcoming mid-March meeting. Emerging markets performed similarly to developed, with gains in China and Mexico driven by continued reopening sentiment. The once-per-5-year Chinese National People’s Congress is set to meet this coming week, and has often resulted in positive domestic policy announcements. Economic and even housing data from China has also strengthened further into expansion, as expected upon the post-Covid reopening, albeit at a faster speed. Generally, the expected growth bump from the reopening has lifted spirits across the emerging markets complex.

Bonds generally gained last week as interest rates stabilized from prior weeks, with negative February returns the result of yields re-rising. High yield corporate and floating rate bank loans fared best, with positive returns following along with positive equity sentiment. Foreign bonds also earned positive returns, due to a decline in the dollar.

There remains significant investor interest in the short-to-intermediate part of the treasury yield curve, where rates benefit from the curve inversion, and lie just under 5% for the 3-mo. to 2-yr. area (with the latter touching a 15-year high last week). While higher rates always seem beneficial at first glance, they’re not without other risks. While default is not considered one of them for U.S. debt (debt ceiling jokes aside), reinvestment risk is a primary one, as is duration risk, which of course accounts for chances of good bond returns should long-term rates fall back. This is the key feature of the diversification benefit offered by bonds in a portfolio. Cash or short-term bonds can provide some decent yields for the time being, which has helped emergency funds, but ultrashort bonds can actually have a stronger correlation to equities at times than do intermediate bonds, as measured over the past few decades.

Commodities rose a few percent on net last week, with gains in energy and metals offsetting a decline in ag. Crude oil rose over 4% just under $80/barrel. After falling from the low $90’s last November, crude has bounced around within a fairly tight trading range of $70-80, with an apparent more consistent and offsetting supply/demand balance. However, natural gas prices remained volatile, up nearly 20% last week alone with a colder-than-expected March weather forecast for a good part of the U.S.

Period ending 3/3/2023	1 Week %	YTD %
DJIA	1.85	1.15
S&P 500	1.96	5.69
NASDAQ	2.61	11,87
Russell 2000	2.05	9.70
MSCI-EAFE	1.81	6.77
MSCI-EM	1.68	3.43
Bloomberg U.S. Aggregate	0.12	0.28

 

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2022	4.42	4.41	3.99	3.88	3.97
2/24/2023	4.86	4.78	4.19	3.95	3.93
3/3/2023	4.91	4.86	4.26	3.97	3.90

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                                    

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.