​The Markets
 
Better than expected.
 
It’s earnings season – the time when publicly traded companies report on how profitable they were during the first quarter of 2023. So far, reports suggest that companies listed on United States stock exchanges did better than many had anticipated. Almost 20 percent of companies in the Standard & Poor’s 500 Index have reported and three-out-of-four have exceeded earnings expectations, reported John Butters of FactSet.
 
“At any given moment, earnings expectations reflect everything that’s happening in the world, from the economy and the Federal Reserve to interest rates and geopolitics. Right now, most of the fear stems from expectations about the economy. The Fed has lifted interest rates to tamp down inflation by reducing economic demand, and so far, that seems to be working. The rate of inflation has been cut almost in half from its post-COVID peak, but growth is slowing with it...And since higher rates operate with a lag, the full effects of the rate hikes probably haven’t been felt yet, raising the possibility of a recession,” reported Jacob Sonenshine of Barron’s.
 
Banks were among the first companies to report on earnings, and the news reassured investors who were concerned about financial stability after the collapse of three regional banks. Despite contributing $30 billion to bailout a regional bank, big U.S. banks generally reported healthy results and higher interest income in the first quarter, reported Max Reyes of Bloomberg.
 
The banks still face significant challenges. Loan delinquencies have been rising from historic lows as  the pandemic policies have come to an end. The four largest lenders in the United States saw a 73 percent increase in consumer loan defaults and have significantly increased the assets set aside to cover loan losses.
 
Last week, many major U.S. stock indices finished the week close to where they started it, according to Barron’s. Yields on U.S. Treasuries generally moved higher before retreating a bit.

​The Markets
 
Keep your eye on the big picture.
 
Last week, there was nothing too surprising in economic and financial news.
 
Inflation eased, as expected, although it remained above the Federal Reserve (Fed)’s target rate. The Treasury yield curve remained inverted with three-month Treasury bills yielding more than 10-year Treasury notes, as they have been since November 2022. Also, we may be nearing an end to rate hikes around the world. Bloomberg News reported:
 
“With the first signs of dents in economic growth now visible, and fallout from financial-market tensions lingering, any pause by the Federal Reserve after at least one more increase in May could cement a turn in what has been the most aggressive global tightening cycle in decades.”
 
Recession predictions for the United States continue to be prominent and varied, ranging from no recession to mild recession to deep recession over the next three to 18 months, reported Rafael Nam and Greg Rosalsky of NPR.
 
Minutes from the Fed’s March meeting were released last week, and they show that Federal Open Market Committee members think tightening credit conditions could result in a mild recession later this year with recovery following in 2024 and 2025. 
 
While the idea of an economic downturn can be unnerving, recessions are part of every economic cycle. In times of uncertainty, it can help to step back and look at the big picture: the United States is quite remarkable.
 
“Nearly four-fifths of Americans tell pollsters that their children will be worse off than they are. In fact, America has sustained its decades-long record as the world’s richest, most productive and most innovative big economy. Indeed, it is leaving its peers ever further in the dust…American firms own more than a fifth of patents registered abroad, more than China and Germany put together,” noted Zanny Minton Beddoes of The Economist.
 
Economic and market uncertainty persists in the United States and elsewhere. We may experience a recession this year. We may not. Either way, it’s important to keep the big picture in mind. Recessions are one part of the economic cycle – expansions are another.
 
Last week, major U.S. stock indices finished ­­­­­­higher, reported ­­­­­Nicholas Jasinski of Barron’s. In the Treasury market, yields on many maturities moved higher over the week.

​The Markets
 
Ambiguous images.
 
Some illustrations are optical illusions. When two people view the picture, they may see completely different images. A good example is Rubin’s Vase. One viewer may see a vase, while another sees two faces.
 
Current economic conditions can be interpreted in different ways, too. Recent economic data and a possible credit crunch, resulting from upheaval in the banking sector, suggest growth is slowing. After viewing the data, some say we’re heading for a soft landing, and others say a recession is coming. Here is the recent data:
 

• Consumer spending. This is the main driver of economic growth in the United States. While Americans are still buying, the pace of spending slowed in February, according to a late-March report from the Bureau of Economic Analysis. Less spending means lower demand for goods and services – and that effects production.

 

• Production of goods and services. Last week, the Institute for Supply Management reported that activity in the manufacturing sector – automakers, food producers, pharmaceutical companies and other companies that make products – shrank for the fifth consecutive month. Activity in the services sector – airlines, banks, building maintenance and other companies that provide services – continued to expand but at a slower pace.

 

• Employment. The employment report indicated the labor market in the U.S. remained resilient and jobs growth was solid in March. It’s notable that there were fewer job openings and more Americans returned to the workforce. The unemployment rate remained steady at 3.5 percent. In addition, average hourly earnings edged higher, according to the U.S. Bureau of Labor Statistics.

 
Randall Forsyth of Barron’s reported, “The solid employment report for March further raises the odds that the U.S. economy is headed for a proverbial soft landing.” Not everyone agrees.
 
Economist and former Treasury Secretary Lawrence Summers gives more weight to manufacturing and services data than employment data. He also pointed to the Dallas Federal Reserve’s Banking Conditions Survey, which showed lending volumes declined sharply in March. Summers told Bloomberg’s Wall Street Week with David Westin:
 
“Employment and unemployment are lagging indicators of what’s happening in the real economy…There is some substantial amount of constriction in credit. If you looked at the forward-looking numbers this week from the PMI surveys, those numbers were quite weak…Recession probabilities are going up at this point. The Fed has a very, very difficult decision ahead of it.”
 
Major U.S. stock indices finished the week with mixed results, reported Carleton English of Barron’s. In the Treasury market, yields on many shorter-maturity increased, while yields on longer-maturities fell. 

Guidance Wealth will be closed Friday, April 7th to observe the Good Friday holiday
 ​
​The Markets
 
Perhaps we should call this a pushmi-pullyu market.
 
The first quarter of 2023 brought Dr. Dolittle’s pushmi-pullyu – the rarest animal of all – to mind. It is the offspring of goat-antelopes and unicorns, and has a head at each end of its body. The pushmi-pullyu’s unusual anatomy allows it to easily and rapidly change direction, making it difficult to catch.
 
So far this year, the direction of the economy and financial markets has been elusive, too.
 
Is inflation headed in the right direction? Inflation changed course late in 2022. The monthly change in the rate of inflation, as measured by the PCE Core Price Index (one of the Federal Reserve’s preferred inflation gauges) accelerated late in 2022 and continued to move higher in January 2023. Then, it slowed in February, creating uncertainty about the state of inflation.
 
The latest University of Michigan Consumer Sentiment Survey indicated that Americans expect inflation to fall over the coming year and over the longer term. That’s important because there is a psychological aspect to inflation. When people expect inflation to rise, they spend more, which can push inflation higher.
 
If inflation is trending lower, then it gives weight to the opinion of investors who are optimistic the Fed will reverse course this year.
 
Will rate hikes continue or pause? Amid persistent inflation, the Federal Reserve delivered the message that rates might go higher than expected and stay there longer than expected. Then three banks failed, and speculation that the Fed would slow the pace of rate increases began. “The challenge for the Fed is figuring out how to buttress banks and cool inflation at the same time, without triggering a recession,” reported Megan Cassella of Barron’s.
 
The Fed raised rates in March, despite turmoil in the banking sector. Treasury yields fell across much of the yield curve following the rate hike. Yields moved higher last week, which suggests that bond investors may anticipate further rate hikes.
 
While many investors appear to be optimistic that the Fed will take a breather on rate hikes, Fed projections suggest it will continue to raise rates in 2023, although it may ease in 2024.
 
Are we headed for a recession? It’s a question that economists and analysts have been trying to answer for more than a year as central banks in the U.S., Europe, and elsewhere raised rates aggressively. Last week, Bloomberg’s survey of economists found the probability of a recession over the next 12 months was 65 percent, up from 60 percent in February.
 
“After the Fed last week raised rates a quarter percentage point to the highest since 2007, economists worry not only about the impact on demand but the effect on the banking system…Financial institutions risk becoming more guarded in their lending approach, restricting access to capital needed by businesses to expand and consumers to buy homes, cars and other big-ticket items,” reported Augusta Saraiva and Kyungjin Yoo of Bloomberg.
 
While the odds of recession crept higher last week, not everyone agrees that a recession is ahead.
 
Is the economy weakening or strengthening? We’ve seen strong jobs growth, yet the unemployment rate has risen as labor force participation increased. In addition, business activity was up sharply in March 2023.
 
“U.S. companies signaled a renewed expansion in business activity in March...Output grew at a solid pace that was the fastest since May 2022 as demand conditions improved and new order growth returned. Manufacturers and service providers alike registered upturns in output, with service sector firms driving the increase,” reported the S&P Global Flash US Composite PMI™ report.
 
The economic tea leaves have not provided a definitive answer about the strength and direction of the economy.
 
Despite all of the uncertainty, stock investors were optimistic last week, and major U.S. stock indices rose, reported Nicholas Jasinski of Barron’s. The Treasury market headed in the other direction as rates across most maturities of Treasuries rose and bond prices fell.
 
In a pushmi-pullyu market, it’s important to stay focused on your long-term financial goals. Basic principles of investing such as asset allocation, diversification and portfolio rebalancing remain sound. If you are feeling unsettled by market volatility, get in touch. We can review your goals and allocations to make sure they’re aligned.