Weekly Market Update: March 20, 2023
The Federal Reserve is monitoring another troublesome situation in addition to its now year-long battle to tame inflation. The central bank has deployed its most restrictive monetary course in four decades, raising the benchmark federal funds rate by more than four percentage points. The rapid change in rates was also an element in a liquidity crunch at a few regional banks. To oversimplify, some banks invested in longer term notes that they could not readily turn into cash to meet large withdrawals from depositors. This prompted the federal government to step in and protect deposits at Silicon Valley Bank and Signature Bank. Volatility in the credit markets spiked on the news, and many strong mid-size banks saw their stocks gyrate based on a fear factor
The shuttering of the aforementioned regional banks brought talk of a contagion. However, the approximately 15 largest banks, which are operating under stricter lending rules since the financial crisis of 2008-2009, have not shown signs of financial stress. The overall credit situation, though, bears watching, as the Fed’s increasingly restrictive monetary policies could increase stress in the financial system that could potentially extend to Corporate America and the consumer sector. Business investment has fallen, while consumer credit card balances have risen to record levels. This will likely weigh on economic growth in the coming months.
Inflation eased some last month, but remains elevated. Indeed, the February Consumer Price Index (CPI) rose 0.4% and 6.0% on a month-to-month and one-year basis, respectively, with a decline in food prices offsetting higher energy costs. The core-CPI, which excludes the volatile food and energy components, climbed 5.5% over the last 12 months.
The U.S. labor market remains a bright spot. In fact, nonfarm payrolls expanded by 311,000 positions in February on the heels of an even stronger January, exceeding expectations and still signaling a solid labor market. The unemployment rate ticked up to 3.6%, but some of that can be attributed to more workers returning to the labor force. The increased labor participation rate will help the Fed in its battle to tackle inflation because more workers competing for available jobs would likely put downward pressure on salaries.
Conclusion: Volatility in the stock and bond markets spiked on the regional bank news. This reinforces our stance that investors should focus their attention on top-quality companies.