Follow the Light
-Albert Einstein
The Capital markets are finishing the first quarter of
2023 in positive territory. Part of this achievement can be attributed to the
overall oversold condition that existed at the end of 2022. And while there has
been enough volatility to feed hungry bears, there is a clear shift in the
appetite the Bulls are looking feed. As expectations of Fed rate hikes have
been disrupted by the various bank problems the narrative used to describe
every day is when markets go up, investors feel comfortable with the banking
sector, and when it goes down, they fear it. I prefer to pay attention to
neither. As outlined last week, the bankruptcy of SVB and depositor challenges
facing First Republic could be a gift to the Fed, and it’s a position that has a
growing agreement. Overall activity in the equity markets has also reacted
favorably to declining treasury yields. For now, the recent technically
oversold condition of both equities and bonds has made its way, in my opinion,
into overbought territory. Not a reason to sell nor buy, but hold and continue
to wait patiently for opportunities to use available cash. Earnings results
should provide us with such opportunities.
From the standpoint of the domestic economy, the release
this week of GDP
data for the last quarter of 2022 shows a slight revision down from the
original estimate, from 2.7% to 2.6%. Much of the gain was attributed to
inventory growth and consumer spending, and this week .3% rise in Personal
Income will likely keep spending active. Most notable, was the decline in
corporate profits, an outcome that should make for an interesting earnings
season. This week also saw a softening of inflation from the U.S. Core PCE
(Personal Consumption Expenditure) Index, which measures the changes in the
price of goods and services purchased by consumers for the purpose of
consumption (excluding food and energy) from last month, from .05% to .03%.
Good news that’s been reflected in the stock market’s recent rise. That said,
the Feds recent increase in short rates was followed by Chairman Powell’s
speech where he explicitly stated that the board saw the potential for recession
before the end of this year. Good or bad news?
Currently there are no clear signals of an impending
recession, however, in my opinion, it doesn’t historically pay to doubt the
Fed. But I would also welcome a slowdown in academic activity for two reasons.
One, because a pause in Fed actions would be likely, and two, recessions are a
certainty, and the capital markets love certainties. This doesn’t imply that
the headwinds to a genuine Bull market won’t sit idly without a fight, as by
the end of the year the next election will be news, and we know how much of a
distraction that can be. Non-domestic events, such as the war in Ukraine and
the increasing presence of China on the capitalist stage, emphasized by their
recently launched cybersecurity investigation into semiconductor company Micron
(MU), also are both troubling uncertainties. In the interim, in my
opinion, a recession will likely have a global impact, and will grab far more
attention from the consuming public, leaving a complicated narrative and
naysayers with a small audience. A positive for the forward focus of the
capital markets.
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