Commentary for Q2, 2023

So far this year, the direction of the economy and financial markets has been elusive.

Is inflation headed in the right direction? Inflation changed course late in 2022. The monthly change in the rate of inflation, as measured by the PCE Core Price Index (one of the Federal Reserve’s preferred inflation gauges) accelerated late in 2022 and continued to move higher in January 2023. Then, it slowed in February, creating uncertainty about the state of inflation. 

The latest University of Michigan Consumer Sentiment Survey indicated that Americans expect inflation to fall over the coming year and over the longer term. That’s important because there is a psychological aspect to inflation. When people expect inflation to rise, they spend more, which can push inflation higher.

Will rate hikes continue or pause? Amid persistent inflation, the Federal Reserve delivered the message that rates might go higher than expected and stay there longer than expected. Then three banks failed, and speculation that the Fed would slow the pace of rate increases began. “The challenge for the Fed is figuring out how to buttress banks and cool inflation at the same time, without triggering a recession,” reported Megan Cassella of Barron’s

The Fed raised rates in March, despite turmoil in the banking sector. Treasury yields fell across much of the yield curve following the rate hike.  While many investors appear to be optimistic that the Fed will take a breather on rate hikes, Fed projections suggest it will continue to raise rates in 2023, although it may ease in 2024.

Are we headed for a recession? It’s a question that economists and analysts have been trying to answer for more than a year as central banks in the U.S., Europe, and elsewhere raised rates aggressively. Last week, Bloomberg’s survey of economists found the probability of a recession over the next 12 months was 65 percent, up from 60 percent in February.

Financial institutions risk becoming more guarded in their lending approach, restricting access to capital needed by businesses to expand and consumers to buy homes, cars and other big-ticket items.  While the odds of recession crept higher last week, not everyone agrees that a recession is ahead.

If you are feeling unsettled by market volatility, get in touch. We can review your goals and allocations to make sure they’re aligned.

Data as of 3/31/23Y-T-D1-Year3-Year5-Year10-Year
Standard & Poor’s 500 Index7.0%-9.3%16.7%9.7%10.2%
Dow Jones Global ex-U.S. Index5.8-8.29.4-0.11.9
10-year Treasury Note (yield only)N/A2.
Gold (per ounce)
Bloomberg Commodity Index-6.5-