March 2023 Market Perspective

Ryan Hastie, Financial Advisor |

January started the year on a good note for investors, with stocks up for the month on feelings of a possible pivot by the Federal Reserve (Fed). Although the Fed did raise interest rates 25 basis points at the conclusion of last month’s meeting, there are growing fears that they may have to raise interest rates higher than previously expected. Those fears were only intensified during Fed Chair Jerome Powell’s comments during his semiannual monetary policy report to Congress. “The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated,” he stated. “If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” he continued.

Following a 6.4% increase in the Consumer Price Index (CPI) in January, February saw inflation increase 0.4% for the month and 6.0% year-over-year, both in line with Dow Jones Estimates. Core CPI, excluding volatile food and energy prices, rose 0.5% in February and at an annual rate of 5.5%. Energy was again one of the main contributors to headline CPI, falling 0.6% for the month and decreasing the year-over-year increase to 5.2%. The largest decline for energy was a 7.9% decrease in fuel oil prices.

Heading into the latest CPI report, analysts expected the Fed to raise rates by another 25 basis points. Following the latest CPI report, that feeling was nearly cemented, with the probability of another 25 basis points increased to 85%, according to a CME Group estimate. The next Fed meeting is scheduled for March 21-22 and will also see the release of their Summary of Economic Projections.

Volatility has been ever-present over the past several months. One common theme observed in the markets has been hope-fueled rallies heading into Fed meetings for a slowdown or cessation of interest rate increases. These rallies have only fizzled as the Fed has continued to hike rates to cool decades-high inflation. The markets and investors are optimistic that when the Fed pauses rate increases it would ignite a market rally and begin a recovery from the significant downfall of the market in 2022.

Although recent turmoil in the banking sector has some suggesting the Fed may pause interest rate increases, general consensus is the central bank will continue its fight against inflation. “Even amid current banking scares, the Fed will still prioritize price stability over growth and likely hike rates by 0.25% at the upcoming meeting,” said Jeffrey Roach, chief economist at LPL Financial.

In early March, Silicon Valley Bank (SVB) collapsed and was seized by the Federal Deposit Insurance Corporation. SVB provided banking services to almost half the country’s technology and life-science companies and over 2,500 venture capital firms. The bank performed a common practice – they held some deposits in cash and used the remainder to invest in long-term Treasuries. With interest rates having been low for many years, these investments offered safe, modest returns. Over the past year as the Fed engaged on its interest rate hiking campaign, those older bonds with lower interest rates became less attractive to investors. The bank needed to sell some if these treasuries to raise capital – unfortunately, they had to sell them at a $1.8 billion loss, as they offered lower yields than current Treasuries. Once word got out, investors panicked and rushed to withdraw funds (totally $42 billion) due to fears of the bank becoming insolvent. Two days later, regulators took control of Signature Bank on fears of a potential bank run after investors began pulling money. At this point, analysts are viewing SVB’s collapse as an isolated incident and other bank runs are merely hysteria-driven. On major factor being attributed to the collapse is poor asset management by bank executives. Regulators are stepping in to quell investor fears of a larger, systemic issue within the banking industry.

Those fears of banking industry troubles all but faded following the release of the February CPI report. Markets are rallying on the hopes that the Fed will slow or halt their aggressive rate hiking action. All eyes will be on the Fed as it nears its next meeting at the end of the month.