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Market Currents – 5/15/23

  • A Period of Consolidation. After a positive start to the year, financial markets entered a holding pattern during the month of April.  Banking industry jitters and the debt ceiling standoff were likely contributors to the market pause. The S&P 500 benchmark posted marginal gains for the month, helped by corporate earnings that were down year over year, but better than feared.  In contrast to larger companies, small and mid-size firms have struggled for traction. Fixed income was up slightly (i.e., rates declined modestly).
  • Debt Ceiling Drama. The ongoing debt ceiling negotiations remain a source of market agita.  Failure to reach an agreement would be unprecedented, as the US has never intentionally defaulted on its debt.  As the negotiations continue, we believe the economic and political fallout resulting from a default event are unpalatable for all parties, and a deal (possibly in the eleventh hour) remains the most likely outcome.
  • Banking Sector. While worries over deposit flight have eased in recent weeks, investors remain concerned over the exposure of banks, in particular regional lenders, to the commercial real estate sector. The work from home movement has lessened the demand for office space, and is devaluing office properties.  Banks appear to be tightening credit availability somewhat to protect their balance sheets.
  • Inflation and Monetary Policy. There are signs that global monetary policy and inflation are both hitting a dovish inflection point.  The latest Consumer Price Index headline saw an increase of 4.9% over the last 12 months, the first time the read has a “4” handle since April 2021.  In their latest meeting, the Federal Reserve approved its 10th interest rate increase in just a little over a year, and dropped a tentative hint that the current tightening cycle is nearing its end.
  • Corporate Earnings. Q1 earnings season is mostly complete.  Results largely came in better than anticipated, benefiting from several significant tailwinds that helped their bottom-line:  aggressive cost cutting, normalizing supply chains, cleaner inventories, reduced currency pressures, and improved China demand.  Large-cap technology stocks, in particular, saw notable strength.  For the first time in a long time, estimated earnings for the balance of the year are now trending higher, too.
  • Market Outlook. With the debt ceiling issue taking on increasing urgency, we believe an eventual deal remains the most likely outcome.  Economic uncertainties abound, however, and the debate on whether the Fed can achieve a “hard” or “soft” economic landing rages on.  Despite the economic pressures, US corporations are once again proving their margin preservation abilities.  Our outlook is cautiously optimistic based on three key factors:  corporate earnings resilience, a Fed rate cycle drawing close to its end, and favorable technical factors (pervasive bearishness and defensive positioning).  We do have some concerns over the narrowness of the market, where the advance is, at present, led by a handful of tech stocks.  We continue to monitor market developments, and will act accordingly, on clients’ behalf.