Watch the CPK Market Action Report: March 2023
February presented investors with inflation data that was hotter than expected alongside growth data that implied the economy is not really slowing. This news put downward pressure on stocks preventing them from adding to their gains for the year. What does this mean for future rate hikes, and will the Fed need to take a stronger position to slow down the economy and inflation?
Watch the Market Action Report now:
Market Action Report
March 2023
INTRO TAG
February presented investors with inflation data that was hotter than expected alongside growth data that implied the economy is not really slowing. This news put downward pressure on stocks preventing them from adding to their gains for the year. What does this mean for future rate hikes, and will the Fed need to take a stronger position to slow down the economy and inflation?
That action starts, NOW!
INDEX PERFORMANCE RECAP
Although the February market performance was not terrible, we did experience a slow grind lower for all the indices. The Nasdaq was down the least losing 1.02% and the S&P 500 was close behind falling just -2.45%. The Dow Jones Industrials took the top spot dropping -4.06%.
EQUITY UPDATE
With equities feeling a little pressure from the most recent economic news, it should be no surprise that Information Technology, Industrials and Consumer Staples were the standout performers for the month. Over the past several months, and despite increasing pressure from rising rates and clear warnings of future economic growth from the yield curve, economic data has remained broadly buoyant. That implies the Fed simply hasn’t hiked enough to cool the economy yet and until we begin to see clear signs of weakening, I will continue to be skeptical of any ideas of imminent Fed pivots or pauses, and instead continue to brace for high, or higher, bond yields.
BOND UPDATE
Bond yields reversed course from January and saw sizeable increases across the board. The 5yr rose to 4.16% and the 10yr 3.91%. On the longer end of the curve, the 30 yr yield rose to 3.93%.
The ISM PMI came in slightly lower than expected today indicating the US manufacturing continued to contract during the month, but less than it did in January. If the services PMI is hot on the headline and price indices, and next week’s CPI is hot, then yields will continue higher—and likely sharply so.
COMMODITY UPDATE
Crude spiked early in the month but began to falter mid-month and closed out at $77.05/barrel. While geopolitical tensions between the U.S. and China weighed on sentiment, traders were also eyeing news out of Russia as they cut oil flows via pipeline to Poland in response to the latter nation supplying tanks to Ukraine. Going forward, oil could surely rally given the right headlines, but beyond the near term the most-likely path of least resistance is lower for oil in 2023 as the threat of recession looms.
Copper had a sharp decline mid-month but was able to recover in the last couple days to close out at $4.09. With copper not able to approach last Friday’s highs and the trend has turned bearish for the coming weeks with key support at $3.80 in focus. If copper can’t stabilize, that will suggest traders don’t have faith in the sustainability of the recent string of strong economic reports.
Gold had a rough month dropping over 5% and closing out at $1.828.90/oz. Gold is attempting to establish support near a former resistance area in the low $1,800s. The critical factor that will decide whether the bulls are successful in defending $1,800/oz., is whether the dollar and yields make new highs as that would be a familiar, dual headwind that is not favorable for precious metals.
CURRENCY UPDATE
The dollar had an impressive run this month up nearly 3.5% to close out at $104.96. The dollar has rallied hard as the idea the Fed would become the least-hawkish central bank has been demolished and the dollar has traded above resistance at 105. If data continues to come in hot, a run towards the upper 105-110 range should not be ruled out.
ECONOMIC UPDATE
Markets came into the month concerned about a slowing (or reversal) in the trend of disinflation and rising expectations for Fed rate hikes. Those concerns were made worse when Core PCE Price Index showed a reversal in disinflation trends. The Core PCE Price Index rose 0.6% vs. (E) 0.4% m/m and 4.7% vs. (E) 4.3% y/y. What made these numbers so disappointing was that the monthly and headline readings were increases over the previous month, implying the trend in disinflation didn’t just slow, it reversed! Now, one number doesn’t negate the reams of inflation data that shows inflation pressures have eased over the past several months, and the trend in inflation is lower. But this report does imply the pace of that decline has slowed materially, and it may well take inflation much longer than hoped to return to some acceptable level that allows the Fed to stop rate hikes.
Additionally, the February Flash Composite PMIs showed an economy that’s resilient. Both the manufacturing at 47.8 vs. an expected 47.3 and the services at 50.5 vs. an expected 47.2 showed stronger-than-expected activity. The services PMI was especially notable as that’s the portion of the economy the Fed is trying to slow to ease inflation pressures and that’s not the type of progress the Fed will want to see.
On employment, the data remained strong. Weekly jobless claims remained below 200k at 190k, a level that’s much too low for a Fed that’s looking to ease wage pressures by returning the labor market to a better sense of balance. So, the economic data last week clearly showed that the trend in disinflation has slowed and may be temporarily reversing, and that’s causing rate hike expectations and bond yields to rise and it’s pressuring stocks, just like it did in 2022. For the rally to resume, markets will need to see new proof that disinflation is reaccelerating, and growth is cooling (but not collapsing). Clearly, inflation is declining. While we are seeing that pretty much everywhere, we should not expect it to be a linear process. There will be gains and some setbacks, but broadly, disinflation remains a positive for the market and certainly much better than where we were last year. That’s encouraging.
THE WRAP
As we look ahead, I think we will continue to experience a back-and-forth tug-a-war between the dollar and the equity markets until we get some true clarity that the economy and workforce will be able to muscle through the pressures of the Fed in their attempt to cool inflation. At this point, the progress has been minimal and there is still quite a bit of work to do. If the analysts are right, consumers should start to see their bank accounts normalize from the stimulus actions taken during the pandemic around June or July of this year. Assuming, the market always moves in anticipation of where the economy will most likely go, we might be able to get a nice sustainable bounce in equities sometime in the second half of 2023.
CPK FOCUS
For the month of March, the cash allocation in our equity models remains at 40% due to the model’s more aggressive nature. Year to date, this approach has allowed us to outperform all three of the major indices.
Our broad focus is on International Equities, Cash and Domestic Equities.
In International Equities, our focus is on Europe Emerging, Latin America and Europe Developed.
As for Domestic Equities, our focus is on Mid Cap Value, Mid Cap Blend and Small Cap Value with an emphasis on Basic Materials, Financials, Industrials, Consumer Non-Cyclical and Energy.
CPK DISCLAIMER
As a reminder, my current allocation is not a recommendation. Regardless of what happens next, investors like you need to have a simple and yet solid financial plan that reduces RISKS, COSTS and TAXES while securing the necessary income you need to maintain your lifestyle throughout retirement.
If you don’t have a plan OR you’re not comfortable with the plan you have, call me today to get pointed in the right direction.
I’m Chad Kunc and that puts a wrap on the March 2023 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.
And that action starts, NOW!