Weekly Economic Update: March 21, 2023
Presented by Nicholas Wealth Management
THE WEEK ON WALL STREET
Amid the reverberations of two U.S. banks being taken over by regulators and the spread of uncertainty to European banks, stocks trended higher last week on the strength of the technology sector.
The Dow Jones Industrial Average was flat (-0.15%), while the Standard & Poor’s 500 rose 1.43%. The Nasdaq Composite index picked up 4.41%. The MSCI EAFE index, which tracks developed overseas stock markets, was also flat (+0.05%).1,2,3
STOCKS GAIN DESPITE BANKING WOES
Stock prices gyrated as investors wrestled with banking troubles that appeared to spread to Europe. Worries of financial instability rocked financials and sent bond yields falling. While the rush into Treasuries was expected, the dash into technology stocks was a surprise. Falling yields made the high-growth names more attractive, though investors targeted their buying in high-quality companies that offered defensive characteristics, such as profits, healthy cash flows, and strong balance sheets.
When Switzerland’s central bank provided a lifeline to a troubled Swiss bank, and a group of U.S. banks provided aid to a struggling regional bank, stocks powered higher on Thursday. Banking jitters, however, returned on Friday, closing out a tumultuous week and paring some of the week’s gains.
REVERSE PSYCHOLOGY
Less than two weeks ago, Fed Chair Jerome Powell testified interest rates might have to be hiked higher and faster. Since then, two U.S. banks were placed in receivership, sparking worries of financial instability and changing the market’s outlook on future rate hikes.
Federal Reserve officials raised interest rates by a quarter-point on Wednesday, as officials tried to balance two conflicting problems: the risk of runaway inflation and the threat of turmoil in the banking system.
The banking instability of the past 2 weeks has provided the cover the Federal Reserve needs to potentially pause future rate hikes. The Fed believes that while the banking system is “sound and resilient", the fallout will cause tighter conditions for households and businesses and will weigh on economic activity. We have yet to see this, but the Federal Reserve seems to think this will have a large enough impact that ongoing increases are no longer necessary. The real shock for markets may come from additional CPI reports that could show inflation is not being impacted by the contagion from the banking sector. Chair Jerome Powell doubled down on the Federal Reserve's mission to bring inflation down to 2%, but the market may be underestimating how long it could take to reduce inflation. This may not happen quickly or smoothly. Rate cuts are not in the Fed’s “base case” so there will need to be more more damage for the economy and markets before we get anywhere close to a 2% inflation rate. Jay Powell refused to say the job of the Fed is done, so this could mean continued volatility for markets.
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The forecasts or forward-looking statements are based on assumptions, may not materialize, and are subject to revision without notice.
The market indexes discussed are unmanaged, and generally, considered representative of their respective markets. Index performance is not indicative of the past performance of a particular investment. Indexes do not incur management fees, costs, and expenses. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results.
The Dow Jones Industrial Average is an unmanaged index that is generally considered representative of large-capitalization companies on the U.S. stock market. Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of technology and growth companies. The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) and serves as a benchmark of the performance of major international equity markets, as represented by 21 major MSCI indexes from Europe, Australia, and Southeast Asia. The S&P 500 Composite Index is an unmanaged group of securities that are considered to be representative of the stock market in general.
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CITATIONS:
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The Wall Street Journal, March 17, 2023
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The Wall Street Journal, March 17, 2023
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The Wall Street Journal, March 17, 2023
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CME FedWatch Tool, March 16, 2023
