April Market Commentary: All’s Well That Ends Well? Not So Fast…


March Recap and April Outlook

Equity markets (using the S&P 500 as a proxy) seem to have shrugged off the mid-month volatility following multiple regional U.S. bank failures and the forced sale of a massive Swiss bank.

The bank drama temporarily diverted attention from the economy’s star attractions – the Consumer Price Index (CPI) and the Federal Reserve – but headlines quickly came back to the familiar talking points: obsessing over consumer sentiment, inflation, and when the Fed might end rate hikes.

However, the two issues are definitely connected and – while Fed governors are certainly not celebrating bank failures – the aftermath of the bank failures should help slow the economy (i.e., reduce inflation) as banks pull back on lending. But that slowdown may also increase the risk of recession, since the Fed has less control and maneuverability with a slowing economy than it does with rate hikes.

This could mean that the Fed may pause rate increases sooner than expected, but for now the Fed is playing it safe and went with a 25-basis point (0.25%) hike at the March meeting.

Some of the key the data:

  • 12-month CPI was 6.0% in February. The Bureau of Labor Statistics reported the annual number marked the smallest 12-month increase since September 2021.
  • Consumer sentiment fell to 62. The University of Michigan’s preliminary March reading on the overall index of consumer sentiment experienced the first decline in four months but is still higher than any reading since May 2022.
  • Consumer confidence in the short-term is still below 80. The Conference Board’s Expectations Index captures the short-term outlook for the economy. At a reading of 73, it was higher than in February. But readings below 80 have often signaled a recession is coming in the next year.

How Does the Data Add Up?

The full impact of bank failures is going to take a while to be fully felt in the economy. The pullback in lending is likely already underway as banks trim balance sheets anticipate either new regulations or a further weakening economy (or both!). Banks treat loans as assets, which is why we talk about banks reducing their balance sheets when they slim down their loan books.

Deposits have taken a hit for smaller regional banks as money has moved to bigger banks and/or to money market funds, which have experienced large inflows. The relative shakiness of those regional banks may lead to another round of bank consolidation, as smaller banks either merge or get gobbled up by bigger banks.

Regulatory measures will take a while to be discussed, voted on, and implemented. But this doesn’t look like the same scenario as the 2008-09 housing market crash. While the economy may have moved closer to recession as the money supply dries up, the markets appear to believe that the impact of new banking regulations and tighter lending standards won’t significantly impact companies outside the financial sector.

What does this mean for the Fed? Chairman Powell actually quantified the impact of bank stress and tighter credit as being “the equivalent of a rate hike or perhaps more than that.” However, he didn’t go as far as lowering the terminal Fed Funds rate (the final interest rate that the Fed sets as its long-term target for the federal funds rate), which remained at 5.1% after the Fed’s March meeting – the same as it was in the last estimate in December. More than half of the Fed officials (10 of 18) expect only one more rate increase this year.

Whether this means the Fed will start cutting rates sooner than expected or will pause hikes to give recent impacts to the economy time to be felt will be data-dependent. However, the two main inputs of the strong labor market and (very slowly) slowing inflation aren’t going to give Powell any room for error.

Chart of the Month: The Last 3 Years Captured in One Rising Number

Inflation bounced wildly up, housing prices increased, and the cost of materials to build or repair houses also skyrocketed due to supply chain disruptions. The one number to capture them all? Your homeowner’s insurance.

bar chart of US Home Insurance rate 2021-2023 

Source – Data: Insurify; Chart: Axios Visuals. Note: Insurance rate is for a policy with coverage levels of $250,000 dwelling and $300,000 liability, no claims history, and good credit. *2023 data is projected.

Equity Markets in March

  • The S&P 500 was up 3.51%
  • The Dow Jones Industrial Average rose 1.89%
  • The S&P Mid-Cap 400 returned -3.41%
  • The S&P Small-Cap 600 returned -5.38%

Source: S&P. All performance as of March 31, 2023

After taking a beating throughout most of last year, the poster children for growth stocks – Information Technology – had a gain of 10.93% which added 2.97% to the S&P 500 Index’s return and helped overcome Financials’ 9.55% drop for the sector and 1.13% cost to the index. The first quarter return was 7.50% for the overall index.

Bond Markets

The 10-year U.S. Treasury ended the month at a yield of 3.48%, a drop from February’s 3.98 and almost even with the end of January. The 30-year U.S. Treasury ended the quarter at 3.67%, down from February’s close of 3.92% and again almost even with January’s close. The Bloomberg U.S. Aggregate Bond Index ended March with a return of 2.53% and is positive for the quarter at 2.96%. The equity and bond markets remain positively correlated.

The Smart Investor

Tax season can be exhausting even for people who aren’t CPAs. But before you put those tax thoughts away for another year, take a minute to see if there’s anything you can do differently for next year.

  • Are you taking advantage of tax-efficient savings in HSAs, FSAs, and retirement plans?
  • How about savings for kids’ college? If your state offers a tax break for a 529 plan – even if you haven’t been saving for years – you may be able to fund one and take the money out in the same year to pay college costs and avail of any potential tax break on growth.
  • Are you setting up lower taxes in retirement by converting to a Roth account?
  • Are you taking advantage of the spousal IRA provisions, if only one spouse is working?
  • How about charitable giving? Getting a plan in place now can eliminate year-end scrambles
  • Are you planning any asset sales this year? How will you structure them?
  • Is your estate plan in place? Have you set up a trust?

The goal for tax planning isn’t to lower your taxes in any one year; it’s to plan ahead and pay as little in taxes as possible over the course of your working life & retirement – and then pass on as much as possible to your loved ones.


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The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.

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