Dear Clients & Friends,
Spring is often considered to be an uplifting time, marked by growth and renewed hope as we emerge from the long months of winter and look ahead to the rest of year. Amazingly, over the first four months of the year the stock market has held up incredibly well, despite a recent flurry of activity attempting to rattle the markets and test investors resolve. The S&P 500 Index has returned 9.2% year-to-date (thru 4/30), while the tech-heavy NASDAQ has returned 17.1% over the same time period. With inflation remaining elevated, the Fed continuing to raise rates, and big bank failures, it is a tribute to the forward-looking nature of the markets to continue to grind higher despite these adverse forces.
Yesterday (May 3), the Federal Reserve Board raised short-term interest rates by another quarter percentage point—a move that was widely anticipated. As it stands now, the Federal Funds target range sits between 5.00% - 5.25%. Keep in mind, at the beginning of March 2022 the Fed Funds Rate was 0.00% - 0.25%. Rates have moved up 5% in just over one year—we have never seen rates move this high, this fast (emphasis added). We are witnessing an unprecedented situation, so if anyone tries to claim they know exactly how this episode will end, they are wrong. The Fed’s battle to bring down inflation continues to be the central drama in the markets and if their actions will tip us into a recession.
Another bank collapse also put investors a bit on edge last week as JPMorgan—with financial support from the FDIC—announced it will acquire First Republic Bank, marking the second biggest bank to fail in U.S. history. The story was similar to Silicon Valley Bank, with a concentrated and wealthy deposit base and mismanaged bond portfolio. These unique characteristics and a government backstop make any other large bank failures unlikely in the near term, although the sentiment around banks remains very fragile.
In other significant news, Treasury Secretary Janet Yellen warned that the date when the U.S. might not be able to pay its bills is fast approaching if the debt ceiling is not raised or suspended soon. With the time for debate shrinking, the Treasury encouraged Congress not to wait until the last minute to resolve the debt ceiling issue (as they did in 2011). With any luck, this urgent warning will actually push Congress to resolve the issue sooner rather than later and avoid a summer-long Congressional debate—although nothing will surprise me in Washington. Hopefully, markets will begin to stabilize once the debt ceiling issue is resolved, and the Fed ends its current interest rate tightening campaign.
Looking ahead, our friends at LPL Research, recently pointed out several signs of health for the economy and markets, such as delinquency rates on consumer loans are still below pre-COVID-19 levels. They also noted that business hiring intentions have slowed and consumers are pulling back on spending, and they do not see the types of cracks that were evident in the years leading up to the Great Financial Crisis. There is certainly no clear path for growth just yet, with some banks still under duress and the fate of the debt ceiling yet to be determined, but if the market were to continue to advance higher from here it would be on the backs of a relatively healthy consumer base. At Mercer Partners, we remain eternal optimists and believe strongly in the long-term value of the great companies that we own in our portfolios. We strive to always hope for the best even in the face of adversity.
As always, thank you for your continued trust and confidence. Please reach out if you have any questions-- that's what we are here for.
Nick Enzweiler, CFP® is a registered representative with, and securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Strategic Wealth Advisors Group, a registered investment advisor. Strategic Wealth Advisors Group and Mercer Partners Wealth Management are separate entities from LPL Financial.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of May 3, 2023.
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All index data from FactSet.
The Standard & Poor’s 500 Index (S&P500) is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
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