Wall Street proved resilient during the first quarter of the year, despite rising inflation, uncertainty about the Federal Reserve’s actions, interest-rate hikes, and banking concerns. Inflationary data in January seemed to show inflation may have peaked, and the Fed would scale back its interest-rate hikes, if not cut them. However, subsequent inflation data showed prices ramped up again. Stocks and bond prices dipped as investors responded to concerns that interest rates would continue to rise and for a longer period of time. In addition to the impact of rising inflation, two major banks collapsed in March, sending bank stocks lower. Credit Suisse Group, nearing failure, was taken over by rival UBS Group, while several U.S. banks provided funds to keep First Republic Bank afloat. The economic recession that has been predicted has yet to come to fruition. The labor market remained strong, and while inflation continued to rise, the two primary indicators, the Consumer Price Index and the Personal Consumption Expenditures Price Index, showed prices slowed on an annual basis
The quarter kicked off with stocks enjoying their best January performance since 2019, as inflation data suggested that inflation may have peaked, raising hopes that the Federal Reserve would scale back interest-rate hikes and temper fears of an economic recession. Nevertheless, Federal Reserve Chair Jerome Powell cautioned that the battle against rising inflation was far from over and additional rate hikes were upcoming. In fact, the Federal Reserve hiked interest rates 25.0 basis points on the last day of the month. Growth stocks performed best, with Mega caps making solid gains. Consumer discretionary, communication, and tech sectors performed well, while defensive sectors, such as utilities, health care, and consumer staples, dipped lower. Bond prices advanced, pulling yields lower. While 260,000 new jobs were added in December, the growth was the slowest in two years.
March was a very choppy month for market returns. Despite an apparent banking crisis, investors stayed the course for the most part, driving stocks mostly higher. The Nasdaq and the S&P 500 led the gainers of the benchmark indexes listed here. Several sectors outperformed, including information technology, communication services, and utilities, while financials fell notably on the heels of the aforementioned bank failures. Manufacturing retracted, while services advanced, according to purchasing managers surveyed. Labor remained strong, with 311,000 new jobs added. Hourly earnings rose by $0.08 for the month and 4.6% since February 2022.
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- Employment: Job growth remained strong in February with the addition of 311,000 new jobs, compared with an average monthly gain of 343,000 over the prior six months. Despite federal interest-rate hikes aimed at slowing the economy and inflation, there is little evidence that the supply of labor is peaking. In February, notable job gains occurred in retail trade, government, leisure and hospitality, and health care. Employment declined in information and in transportation and warehousing. The unemployment rate edged up 0.2 percentage point to 3.6%. in February, the number of unemployed persons rose by 242,000 to 5.9 million. The employment-population ratio, at 60.2%, was unchanged in February, while the labor force participation rate, at 62.5%, edged up 0.1 percentage point from the previous month. Both measures have shown little net change since early 2022. In February, average hourly earnings increased by $0.08 to $33.09. Over the past 12 months ended in February, average hourly earnings rose by 4.6%. The average workweek decreased by 0.1 hour to 34.5 hours in February.
- FOMC/interest rates: The Federal Open Market Committee met March 21-22, at which time the Committee increased the Federal Funds target rate range by 25 basis points to 4.75%-5.00%. The statement from the FOMC indicated that it is “strongly committed to returning inflation to its 2.0% objective.” The Committee also noted that it would consider adjusting its policy stance based on “labor market conditions, inflation pressures and inflation expectations, and financial and international developments.”
- GDP/budget: Despite rising interest rates and accelerating inflation, the U.S. economy advanced in the fourth quarter of 2022. The economy, as measured by gross domestic product, accelerated at an annual rate of 2.6% in the fourth quarter of 2022, according to the third and final estimate from the Bureau of Economic Analysis. GDP increased 3.2% in the third quarter after falling in the first and second quarters, 1.6% and 0.6%, respectively. The deceleration in fourth-quarter GDP compared to the previous quarter primarily reflected a downturn in exports and decelerations in consumer spending, nonresidential fixed investment, and state and local government spending. These movements were partly offset by an upturn in private inventory investment, a smaller decrease in residential fixed investment, and an acceleration in federal government spending. Imports, which are a negative in the calculation of GDP, decreased less in the fourth quarter than in the third quarter. Consumer spending, which accounted for about 70.0% of GDP, rose 1.0% in the fourth quarter compared to an increase of 2.3% in the third quarter. Consumer prices increased 3.7% in the fourth quarter (4.3% in the third quarter). Excluding food and energy, consumer prices advanced 4.4% in the fourth quarter (4.7% in the third quarter). In 2022, consumer prices increased 6.3%, compared with an increase of 4.0% in 2021. Overall, In GDP increased 2.1% in 2022, compared with an increase of 5.9% in 2021.
- Inflation/consumer spending: Inflationary pressures continued to mount in February. According to the latest Personal Income and Outlays report, the Personal Consumption Expenditures Price Index increased 0.3% in February and 5.0% since February 2022. Prices excluding food and energy also advanced 0.3%, following increases of 0.5% in January and 0.4% in December. Prices for goods rose 0.2%, while prices for services increased 0.3% in February, with prices for food rising 0.2%, although prices for energy fell 0.4%. Since February 2022, consumer prices for food increased 9.7% and energy prices rose 5.1%. Personal income rose 0.3% in February, while disposable personal income increased 0.5%. Consumer spending rose 0.2% in February after climbing 2.0% the previous month.
- Housing: Sales of existing homes increased for the first time in thirteen months after vaulting 14.5% in February. Despite the increase, existing-home sales dropped 22.6% from February 2022. According to the report from the National Association of Realtors®, home buyers took advantage of any interest rate declines, while some areas of the country saw gains where home prices declined. The median existing-home price was $363,000 in February, higher than the January price of $361,200 but slightly lower than the February 2022 price of $363,700. Unsold inventory of existing homes represents a 2.6-month supply at the current sales pace, marginally lower than the January supply of 2.9 months. Sales of existing single-family homes rose 15.3% in February but were down 21.4% from February 2022. The median existing single-family home price was $367,500 in February, up from $365,400 in January but lower than the February 2022 price of $370,000.
- Manufacturing: Industrial production was unchanged in February, following a 0.3% increase in January and a 1.4% drop in December. Manufacturing increased 0.1% in February (1.3% in January) but was 1.0% below its year-earlier level. Mining decreased 0.6%. Utilities, on the other hand, rose 0.5% over the 12 months ended in February, total industrial production was 0.2% below its year-earlier level.
- International markets: The battle against rising inflation remained at the forefront for most of the world’s economies. Core inflation (excluding food and energy prices) hit a record high in the eurozone for March. The European Central Bank hiked interest rates 50.0 basis points and will likely call for a similar rate increase in May. The Bank of England added 25.0 basis points to its target interest rate after inflation in February (10.4% annual increase) exceeded the bank’s expectations. On the other hand, inflation in Canada eased in February, falling 0.7 percentage point to an annual rate of 5.2%. Likewise, Japan’s Consumer Price Index fell a full percentage point to 3.3% in February, bolstered by government subsidies for electricity and natural gas. However, food prices continued to rise. For March, the STOXX Europe 600 Index lost 1.4%; the United Kingdom’s FTSE dropped 3.9%; Japan’s Nikkei 225 Index gained 0.4%; and China’s Shanghai Composite Index fell 1.7%.
Eye on the Quarter Ahead
The second quarter is likely to see interest rates continue to be pushed higher by the Federal Reserve. However, rate hikes may be smaller, with the possibility of a reduction in the number of increases. The labor sector should remain solid, although job gains may wane some. Industrial production may actually show some gains, while the services sector is more likely to strengthen.
Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Forecasts are based on current conditions, subject to change, and may not come to pass. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities and other bonds fluctuates with market conditions. Bonds are subject to inflation, interest-rate, and credit risks. As interest rates rise, bond prices typically fall. A bond sold or redeemed prior to maturity may be subject to loss. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 largest, publicly traded companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indexes listed are unmanaged and are not available for direct investment.
Advisory Services are offered through MRA Advisory Group, a Registered Investment Adviser. This information was developed by Broadridge, an independent third party. It is general in nature, is not a complete statement of all information necessary for making an investment decision, and is not a recommendation or a solicitation to buy or sell any security. The investments and strategies mentioned may not be suitable for all investors. Past performance is no guarantee of future results. Nothing herein, nor any attachment, shall be considered to constitute (i) an offer to sell, nor a solicitation of an offer to purchase, any security, or (ii) tax or legal advice.