May 2023 Market Perspective

Bill Hastie, Managing Partner |

The investment markets so far in 2023 continue to battle a tsunami of economic data.  Top of mind has been inflation and the Federal Reserve’s (Fed) actions to battle inflation since early last year, and recent reports show solid progress towards normalization.  April’s consumer price index (CPI) fell on a year-over-year basis with an annual 4.9% increase representing the lowest level of consumer inflation in two years.  Core consumer price growth, which excludes volatile food and energy prices, slowed to an annual rate of 5.5%.

Producer price inflation showed signs of slowing year-over-year growth in April.  Headline producer price growth fell to 2.3% during the month, which was better than expected and marked the lowest level of producer inflation since early 2021.

The University of Michigan reported its consumer sentiment survey for early May.  The previous month’s consumer sentiment was reported to be 63.5, with May’s reading expected to fall slightly to 63.  Consumer sentiment fell more than expected to start May to 57.7, primarily driven by a sharp drop in consumer expectations for future economic conditions.  The result brought the index to its lowest level since November 2022, signaling headwinds for consumer spending in the months ahead.

With inflation looking as though it is getting under control, and the Fed expected to pause its rate hike campaign when it meets in June after raising rates by another 0.25% this month, the banking crisis hit.  The market’s initial reaction to the high-profile banking failures at Silicon Valley Bank, Signature Bank and Silvergate Bank was harsh, sinking the U.S. equity markets for weeks, primarily because the breadth of the banking problems was largely unknown.  Once these banks were acquired, and the announcement late last month that JP Morgan would be acquiring First Republic Bank with the help of U.S. regulators, the market impact of the banking failures became largely muted outside the banks directly involved.

Perhaps the key driver of market direction currently is the debt ceiling talks that are taking place between the Biden administration and the House.  With the June 1 deadline rapidly approaching, it seems agreed upon that the U.S. defaulting on its debt payments is not an acceptable option, but how the two sides propose to get there remain far apart.  The administration seeks a “clean” debt ceiling bill with no other provisions included in the bill.  The House is proposing to increase the debt ceiling, but with future spending “guardrails” included.  Comments to the press by either side continue to have a profound effect on investor sentiment, driving daily market volatility.

Overall, economic and market updates in April were positive, with a mix of good news outweighing the bad.  Market resilience in the face of the First Republic collapse is a good reminder that investors remain relatively confident in the ongoing economic expansion, and better-than-expected earnings in the first quarter show that businesses continue to outperform expectations.

While there are still very real short-term risks that investors face, economic growth in the long run is likely.  The fact that all three major U.S. indices ended last month in positive territory despite a myriad of concerns is an encouraging sign.  With that said, there is potential for further short-term uncertainty which often leads to market volatility.

Equity performance so far this year has largely been short-term bursts based on the news of the day, or the perception that something may happen.  The best example is large cap growth stocks last January.  The applicable index, the Russell 1000 Growth, fell more than 29% last year but experienced a strong bounce in January, lifting that index and the S&P 500 to solid gains for the quarter.  Conversely, the best performing asset class in 2022, the Russell 1000 Value, eked out a gain of about 1% over the same period.

Should you have any questions about your investments or our management strategy going forward, please do not hesitate to contact us.  We see light at the end of the tunnel with recovery being the eventual outcome – but are focused on getting through that tunnel and to recovery in the investment markets.