- April 25, 2023
-- Key Takeaways:
- The economy remains in expansion, but cracks have recently appeared, suggesting that the labor market and economic activity are about to cool.
- We expect the Fed to pause rate hikes next month. This won't be a cure-all, but it will be an important step towards a more sustainable recovery.
- Bank earnings have been better than feared. However, the bar for the tech sector is higher after this year's strong outperformance.
- The rebound in stocks and bonds over the past six months has been supported by the turn in inflation, economic resilience, and the peak in yields. Emerging headwinds suggest that markets might need some further fuel to continue to fly higher.
Amid a flurry of corporate earnings releases and somewhat lackluster market activity last week, an important milestone went largely unnoticed. It was about six months ago that the S&P 500 dipped below 3,600 (down 25% from its high), core inflation accelerated to a 40-year high at 6.6%, and 10-year yields spiked to 4.25%1
. Since then, markets have been climbing the proverbial wall of worry. Both stocks and bonds have rebounded nicely, a trend of lower inflation has been established, and bond yields along with the U.S. dollar have peaked and moved lower.
We use the six-month milestone as an opportunity to reflect on what continues to support the rebound and what does not, and we share our thoughts on what the path ahead might look like.The economy
Source: 1. Bloomberg
- What's working (tailwinds):
- Activity has held up better than feared, and the economy remains in expansion. After adjusting for inflation, U.S. GDP grew 2.6% in the fourth quarter of 2022. And supported by a resilient consumer, estimates from the Atlanta Fed point to a respectable 2.5% growth in the first quarter of this year.
- The source of strength for the economy has been a robust job market, which is helping support personal incomes and spending. Unlike what happens during economic downturns, job gains have slowed but stayed positive, and the unemployment rate remains at historic lows, even with rising participation, as more workers have rejoined the labor force.
- What's not working (headwinds):
- Some cracks have recently appeared, suggesting that the labor market is about to cool. Jobless claims remain low but have been rising over the past six months since bottoming in September 20221. Job openings have started to come down, layoff announcements have been trending up, and temporary-help payrolls are off their highs.
- Since the failure of Silicon Valley Bank, the stress in the banking sector has eased. But there are signs that credit conditions have continued to tighten and that bank lending is slowing.