After a solid start to 2023, February experienced a repricing of risk assets as markets reacted to new economic data. Although almost every asset class finished February in the red, most indexes are still positive for the year, with growth stocks outperforming value and small caps besting their large company peers.
Market expectations differing from the data can explain February's negative return. As stated in the last Capital Market Review, investor expectations in January of the Federal Reserve pivoting to a looser monetary policy later in 2023 do not align with the strong job market, slower-than-hoped-for drop in inflation, and consumers still spending money.
Nearly a year into the fastest rate-hiking cycle the U.S. has experienced, it appears consumers may have missed the message. The goal of rate hikes is to slow the economy by slowing consumer spending, which slows corporate growth, forcing companies to lay off or hire fewer workers, and increasing the unemployment rate, which should lower inflation. Other than technology companies laying off excess pandemic hires, we have yet to see much of this take hold, at least on the surface.
After being forced to stay home with extra savings, consumers are flocking to experiences, keeping demand high in the services sectors. Data from airlines, hotels, restaurants, and theaters show no signs of slowing down. Even on the goods side, the latest Retail Sales report showed growth in every category except for gasoline, which was flat.
While top-line data continues to look strong for the consumer, under-the-surface cracks may be starting to show. If we remove the top 1% from consumer cash balance data, it shows most families are living paycheck to paycheck. Credit card usage is increasing, and credit card and auto loan defaults have started to tick up, leading to the question of how long consumer spending is sustainable to the same degree.
As much as investors want answers to what will happen to the economy and markets over the next few months, the truth is that we do not know. We might be in store for a year of repricing with volatility continuing until there are answers to the economy’s future. No matter how markets react to data, that should not impact investment portfolios. Data changes all the time, and markets will grasp how the newest idea relates to what is already priced. Investment portfolios are built for long-term success; to achieve that, we must look past short-term noise and remain focused on the long term.
Author: Joe Clark, CFA | Research Team | Allegheny Financial Group | March 2023
The information included herein was obtained from sources which we believe reliable. This report is being provided for informational purposes only. It does not represent any specific investment and is not intended to be an offer of sale of any kind. Past performance is not a guarantee of future results.
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