Weekly Market Update: March 6, 2023
January price data showed inflation remains stubbornly high. Stronger-than-expected increases in the Consumer and Producer Price Indexes were followed by a 12-month jump of 5.4% in the January Personal Consumption Expenditures (PCE) Price Index, the gauge of inflation followed most closely by the Federal Reserve. The PCE data indicate that the central bank is having a hard time cooling demand for goods and services enough to push prices notably lower.
The economic data have painted a mixed picture. On the negative side were recent declines in manufacturing activity and residential construction, two sectors that have been hurt by higher borrowing costs. However, the consumer sector, which accounts for roughly two-thirds of the nation’s gross domestic product (GDP), has proven resilient, supported by a still healthy labor market with headline-scale layoffs largely restricted to the technology sector and the use of savings accounts enhanced by COVID-19 pandemic-driven fiscal and monetary stimulus measures.
Treasury market yields spiked on the aforementioned January reports. That is because Fed officials said the central bank will be data dependent when implementing monetary policies. Wall Street now appears to be more in line with the stated views of Fed officials that the benchmark short-term interest rate needs to go comfortably above the 5.00% mark and stay at that level for an extended stretch to effectively fight inflation. The ongoing restrictive monetary policies, which have resulted in a more than four-percentage-point increase in the federal funds rate, have not provided a good back-drop for equities.
All the while, the Treasury market yield curve remains inverted. That, along with a shrinking of the money supply, suggests economic challenges ahead. The question remains how long the consumer can keep up the current pace of spending (up 1.8% in January), as U.S. credit card balances bearing elevated interest rates are rising at a notable clip.
Conclusion: Given the aforementioned headwinds—and the resultant market volatility—we don’t think this is the time to throw caution to the wind. For now, we advise investors to maintain a significant weighting of defensive stocks in their portfolios, along with selective holdings of financially strong growth-oriented companies that may lead the market up once we get to the other side of the current interest rate increase cycle.