The 1st Quarter of 2023 is behind us!
As it turned out, we have seen a slight reversal in the market declines of 2022. Stock and bond market performance closed out Q1 2023 with single digit returns. The route to get here was by no means easy. High inflation remained persistent, and cracks emerged in the banking sector this quarter.
The prospect that the Fed may have been nearing the end of its battle with inflation, lower energy prices, and the reopening of China gave hope to investors early in the quarter. The stock and bond markets rebounded off 2022 lows led by the Technology stocks, and bonds.
Strong economic data and a rise in core inflation in February signaled the need for the Fed to continue raising interest rates. The markets responded with a February sell-off in stocks and bonds. International markets mirrored the US. By March, an unexpected market dilemma surfaced with the failure of Silicon Valley Bank followed by Signature Bank, and the footing of 1st Republic Bank and Credit Suisse starting to crumble. 11 banks stepped in to secure 1st Republic from failure and UBS bought fellow Swiss Bank, Credit Suisse.
The Fed follows a dual mandate: 1. Keep inflation in check 2. Promote full employment. The Fed has raised the Federal Funds Rate at the fastest pace in 40 years to cool the economy and tame inflation. The bank failures and struggles in short are a consequence of this policy. With uncertainty in the banking sector the Fed is called to fulfill a third unwritten mandate to maintain financial stability in times of economic stress. The dual mandate in this economic environment conflicts with the third unwritten mandate, that is to continue to fight inflation they must increase interest rates, but increasing interest rates will put more pressure on banks with similar issues. The solution the Fed stepped in with was to create a lending program that provides the banks with the money they need to avoid having to sell assets and realize the losses. The Fed is providing loans at the face value of the collateral, not the market value which has depreciated due to higher interest rates. The Fed also guaranteed all deposits, not just those within the FDIC limits, this was done in the hopes of avoiding more bank failures. We are in unprecedented territory. The long-term effects wait to be seen. In the short-term, markets reacted favorably to this policy in hopes that the banking system has been shored up and the prospect of higher rates is drawing to an end. The Fed and Central Banks are walking a fine line to cool off the global economy without causing a recession. To combat the potential risk of a recession and market decline associated with flight to investment safety, it is important to seek quality over high-risk investments and diversify.
At Renew Family Wealth we are actively seeking to allocate appropriately based on an investor’s risk tolerance. We welcome the opportunity to assist in assessing how market and economic conditions are impacting you, your family, and those you know. Please do not hesitate to contact us to set up a meeting to discuss how we may be useful to you.
Sincerely,
Scott Miller
Partner
