Update on the Markets:

Index	1st Quarter 2023	Full Year 2023
S & P 500 (Large US Stocks)	7.40%	7.40%
Russell 2000 (Small US Stocks)	2.74%	2.74%
FTSE All-World ex-US (International Stocks)	6.57%	6.57%
Barclays US Aggregate (Bonds)	2.96%	2.96%

April 2023

Key takeaways

► Good quarter for stocks and bonds

► Fed buying time

► Attractive yields in bonds

► Getting paid

► Add stocks on pullbacks

Good Start

Stocks and bonds delivered solid returns in the first quarter, a turbulent one in the end. The quarter started smoothly as investors cheered hints that the Federal Reserve may be near the end of its rate hikes as inflation appeared to be receding. Optimism grew for a “soft landing” where an economic slowdown could be achieved without a painful recession. The labor market remained robust, but the inflation numbers continued to trend lower. In March, the sudden failure of Silicon Valley Bank and Signature Bank – the biggest bank failures since 2008 – and the collapse of Credit Suisse caused chaos in world markets.

Stocks fell, and bond yields dropped. Despite the turmoil, the Fed raised rates by 25 bps at its March meeting and insisted it remains vigilant about taming inflation. Still, it must also consider the ramifications of tighter credit as banks shore up their balance sheets. Quick action by the government prevented contagion (for now), but the damage to the economy may yet be realized. The tightening of lending standards, particularly by smaller regional banks, is often akin to a Fed tightening of 25 – 50 bps. It may take six to twelve months to see the results of a pullback in credit availability, particularly in the already hard-hit commercial real estate sector. For now, the market remains resilient, and we can bask in the solid results for almost all assets. The S&P 500 index rose 7.4%. Growth stocks celebrated lower interest rates. The tech-heavy Nasdaq Composite index had its best quarter in years, up 17% – its best quarter since 2020. Bond yields fell (prices rose).

Looking forward to the second quarter, inflation and interest rates will be front and center.

Fed is buying time

Though inflation is still markedly above the Fed’s 2.0% target – clocking in last at around 6.0% – the recent bank crisis gives the Federal Reserve time to pause in hiking rates. There is always a lag in seeing the effects of Fed policy, and the tighter lending standards due to the banking crisis add a layer of complexity. It may take many months for the impact of historically rapid rate hikes + shrinking credit growth to work through the economy. Commercial real estate, already reeling from Covid (think work from home), must also contend with less credit availability as many regional banks pull back. Many banks bought US Treasuries when rates were near zero. The rapid jump in interest tares has resulted in significant losses on their balance sheets. The Fed is giving banks time to raise capital and return to stability. All of this provides the Fed breathing room. Most investors expect one more hike of 25 bps in May and then a pause.

Getting Paid

Risk cannot be avoided when deciding where to put your hard-earned money to work. Stocks are usually the best place for long-term growth but can suffer from dramatic pullbacks. Bonds are generally safer, but inflation erodes their value over time, and they, too, can suffer steep losses. Even keeping your cash in the mattress involves risk – fire, flood, theft. The key is not to avoid risk but to be compensated for the risk you take. At around 19 times earnings, US stocks do not appear cheap. And expectations for corporate earnings appear stretched as a recession may be imminent. You can find lower valuations abroad, particularly in cheap currencies like the Japanese yen. Still, foreign stocks may follow the US on the way down.

Fortunately, a positive aspect of the Fed’s historic battle with inflation is that yields in bonds, particularly short-term bonds, and money market mutual funds offer attractive yields. It pays to stay short, especially when our battle with inflation has yet to be won. Many money market mutual funds pay around 4.50% with no minimum, trading costs, or redemption fees. US Treasury floating rate securities are close to 5.0%. The yields are attractive compared with inflation, and the short maturities protect you from inflation.

12-Month CD Rates

There are also good opportunities in intermediate-term bonds and bank loans, as the fears of another banking crisis may be overdone. Since most banks still pay next to zero on checking and savings accounts, please review your cash needs and put access cash into a money market mutual fund or short-term securities. Consider CDs for longer-term goals. And municipal bonds are attractive in the 10 to 15-year maturities.

April is usually the best month for stocks. However, there is much to overcome after that: high-interest rates, recession fears, slowing credit growth, commercial real estate woes, and geopolitical tensions. Volatility will remain high. The market has been resilient this far, and the Fed may be near the end of its rate hikes. Also, there is a lot of money on the sidelines (remember money market mutual funds). Eventually, that cash has to come back into the market. To beat the crowd, buying on pullbacks may be a prudent strategy. Maintaining a long-term focus and a well-diversified portfolio that can get you through rough patches is vital to financial success.

Please let me know if you have any questions or concerns.

Sincerely, 
Henry 

Henry Gorecki, CFP® 
HG Wealth Management LLC 
401 N Michigan Ave, Suite 1200
Chicago, IL  60611
312-723-5116