Saturday, March 25, 2023

Market and Economic Update

Switzerland has been known for its high-end watches and high-end banking, contributing to its reputation for quality, reliability, and security. Last Sunday, one of Switzerland's largest banks, Credit Suisse, was forced by the Swiss banking regulators to be taken over by Swiss bank UBS. It is believed that had the banks not merged, Credit Suisse would have failed. This follows several U.S. regional bank failures and fears that more will come. 

It is reported that billionaire investor and owner of the Carolina Panthers, David Tepper lost $17B in contingent convertible bonds as the Swiss government wiped out Credit Suisse stock owners and bondholders.

Monday – The average national retail gas price is $3.53, down 18.46% year over year. Falling gasoline prices and demand can indicate a slowing economy unless the decline is due to increasing supply which has not occurred.

  • Portfolio Change – Underweight the Energy Sector.
Tuesday – In February, U.S. existing home sales increased by 14.5% to a seasonally adjusted annual rate of 4.58 million; however, they are down 22.64% compared to the previous year. This data is not as indicative of the economy's direction as usual. Most homeowners with mortgages have interest rates below 4%, and if they were to sell their current homes and obtain a mortgage for a new property, they would face higher interest rates. This factor discourages homeowners from selling, lowering the inventory of available existing homes on the market. Consequently, home builders may benefit, as a more significant percentage of home sales will likely consist of newly constructed properties.

  • Portfolio Change – Allocation to the Homebuilders sub-sector.

Wednesday – The Federal Reserve's Federal Open Market Committee (FOMC) increased its rate by 0.25%, as anticipated, and maintained its 2023 rate outlook at 5.1%, implying another rate hike is expected. The written statement noted, "some additional policy firming may be appropriate," while removing the phrase, "ongoing increases in the target range will be appropriate." During the press conference, when asked about a potential rate cut in 2023, Chairman Powell responded, "rate cuts are not in our base case." Nonetheless, the bond market remains unconvinced. The Fed Funds Futures market is factoring in four quarter-point rate cuts in 2023 and an additional four in 2024. If the Fed reduces rates as aggressively as the bond market suggests, it could indicate a recession in the latter half of 2023.

  • Portfolio Change – Reduced fixed income duration with an allocation to T-Bills. 

Thursday - Initial claims for unemployment insurance dropped by 1,000 from the previous week, reaching 191,000, which further supports the notion that the labor market continues to be tight. The Federal Reserve perceives a tight labor market as contributing to inflation since employees can request higher wages. These increased wages are then passed on to consumers through higher prices for goods and services.

Friday - St. Louis Federal Reserve President James Bullard increased his terminal Fed Funds rate target to 5.625%. He believes that banking system stresses will diminish in the coming weeks and months, and the robust economy may cause the Fed to need to raise interest rates further.

There is much uncertainty regarding the future path of markets and the economy. I will continue to monitor the market and economic data and adjust portfolio models accordingly.