Dear Friends,
Last year’s bond performance was very disappointing, but at the same time, it was the result of required action by the Federal Reserve to bring inflation down. The culprit for the chaos in both stocks and bonds last year was the Fed’s aggressive rate hikes. Inflation has come down from its high of 9.1% in June 2022 to 5%. Once again, bonds are playing their more traditional role as a more conservative allocation while also offering higher yields. Additionally, our clients’ CDs and money market funds have experienced increased interest rates over the past year following the trend with fixed-income instruments. This is an ideal time to revisit your risk profile and make sure that your portfolio allocations are in line with your tolerance for market volatility and income opportunities.
Economy, Geopolitics, and Commodities
1. U.S. economic growth decelerated to a 1.1% annual rate in the first quarter as consumers faced high inflation, rising interest rates and the onset of banking problems.
The rise in U.S. gross domestic product in the first three months of the year marked a slowdown from seasonally adjusted 2.6% growth in the fourth quarter of 2022, the Commerce Department said Thursday. The U.S. economy grew at around 2.2% a year in the 10 years before the pandemic. Consumer spending, the primary driver of growth, and hiring were surprisingly strong at the start of the year, but more recently slowed as the Federal Reserve continued raising interest rates to cool the economy and curb rapid price increases. The most recent update on the U.S. economy offers Federal Reserve officials and investors a comprehensive perspective on the effectiveness of higher interest rates. Despite the post-pandemic effects, including disrupted global supply chains and rising interest rates, some analysts view the GDP growth number with optimism. They believe that the positive figure suggests that the economy is weathering these impacts with greater resilience.
2. Fed says it failed to act on problems that led to Silicon Valley Bank collapse.
The Federal Reserve’s banking supervisors failed to take forceful action to address growing problems at Silicon Valley Bank before it collapsed last month, the central bank’s top regulator said, signaling a broad push to toughen rules on the industry. Michael Barr, the Fed’s vice chair for supervision, said supervisors didn’t fully appreciate the extent of the vulnerabilities as SVB grew in size and complexity. When supervisors did find risks, they didn’t take sufficient steps to ensure the firm fixed those problems quickly enough, he said in a report Friday.
Regulators took control of Santa Clara, Calif.-based SVB on March 10. The collapse sparked a panic that led to the failure of New York-based Signature Bank and an intervention by financial regulators to protect uninsured depositors at both banks. The Fed supervised SVB and the Federal Deposit Insurance Corp. supervised Signature. Mr. Barr on Friday called for revamping a range of rules that apply to banks with more than $100 billion in assets, and he called for re-evaluating how regulators treat deposits above a $250,000 federal insurance limit. Both banks had a large amount of such deposits, which fled quickly as trouble mounted.
In a statement accompanying the Fed’s report, Fed Chair Jerome Powell said he would back steps outlined by Mr. Barr to toughen industry oversight over the coming years. That would essentially reverse some moves made earlier in Mr. Powell’s tenure to ease the rules for midsize banks. The Fed chair said such changes would lead to “a stronger and more resilient banking system.”
3. U.S.-led sanctions designed to throttle Moscow’s fossil-fuel income face a new challenge: a big jump in the price Russia gets for its oil.
Booming demand in India and China has pushed the price of Urals crude, Russia’s main grade of oil, up to about $55 a barrel from a daily low of $35 in January, according to commodities-data firm Argus Media. The rally contrasts with a retreat in broader oil markets driven by weakening demand in the U.S. and Europe as economies there slow.
Prices could soon run into the $60-a-barrel limit the U.S. and allies placed on most Russian crude exports, putting pressure on the West’s ability to keep Russian oil on the market while still pinching the Kremlin’s revenue. Russian crude trades at a substantial discount to benchmark oil prices, as it has since the invasion of Ukraine, but that gap has narrowed.
Some oil traders are starting to question whether they should keep carrying Urals given the risk of getting caught up by sanctions. Others are finding alternative ways to carry Russian oil at higher prices. Many traders and analysts expect oil to keep flowing, nonetheless. At every stage of the war, Moscow has succeeded in finding new buyers, traders, shippers, insurers, and financiers. It is on track to export 101 million barrels of its crude by sea this month, according to cargo-tracking firm Kpler, just below levels from January 2022.
4. Wage growth stayed elevated to start the year and inflation remained high, likely keeping Federal Reserve policy makers on track to raise rates again next week.
Employers spent 1.2% more on wages and benefits in the first quarter from the prior three months, a slight uptick from an upwardly revised 1.1% increase in the fourth quarter, the Labor Department said Friday. The employment-cost index advanced 4.8% last quarter from a year earlier, an easing from the 5.1% gain at the end of last year. The Fed’s preferred gauge of consumer inflation, the personal-consumption expenditures price index, cooled to 4.2% in March from a year earlier, a separate Commerce Department report said. That was down from the previous month’s 5.1% gain and a peak last June, but still well above the central bank’s 2% target. The latest data sets the Fed up to raise the central bank’s benchmark rate by another quarter-percentage point next week “and keep policy restrictive for some time, until inflation moves convincingly toward target,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.
5. During 2023, numerous companies are cutting thousands of jobs, reversing the hiring boom that occurred during the pandemic, primarily in the technology sector.
This is due to firms preparing for a potential recession. In contrast to the robust labor market in the United States, official government data shows that the unemployment rate is near a 50-year low, and companies in other sectors continue to hire at a fast pace.
In March, companies announced almost 90,000 layoffs, which is a sharp increase from the previous month and a significant acceleration from a year ago. The technology sector was hit particularly hard, with 102,391 cuts announced so far in 2023.
Additionally, the Labor Department reported that weekly jobless claims for the week ended April 1 were at 228,000, above the Dow Jones estimate of 200,000. Continuing claims also nudged higher to 1.823 million, the highest level since December 2021.
Planned hires also decreased in March, with only 9,044 planned additions, the worst for the month since 2015. On a year-to-date basis, planned additions are at their lowest quarterly total since 2016. Meanwhile, planned layoffs totaled 89,703 for the period, a 15% increase from February. Year-to-date, job cuts have skyrocketed to 270,416, a 396% increase from the same period last year. Below is a list of some of the companies announcing job cuts affecting 1,000 or more workers, according to S&P Global Market Intelligence.
6. Earth Day and Invest in our Planet.
It is an annual, poignant reminder of the profound impact human activity has had on the environment and the urgent need to Invest in Our Planet to protect our future. Earth Day is an annual event on April 22 to demonstrate support for environmental protection. First held on April 22, 1970, it now includes a wide range of events coordinated globally by EARTHDAY.ORG including 1 billion people in more than 193 countries.
As we face an increasingly uncertain climate and a rapidly changing world, it is more important than ever to shift our collective consciousness toward a deeper understanding of humanity’s role in this crisis. The challenges we face are urgent, but they also represent an opportunity for us to come together to take bold action and fight for equity and prosperity. Earth Week 2023 has served as a powerful catalyst for this awakening, inspiring us to take responsibility for our actions and to work together in innovative ways to build a sustainable and just world. The Earth is contending with converging environmental crises that are inextricably linked and compounding: climate change and the accelerating destruction of our natural ecosystems. Without bold and prompt action, business leaders and policymakers risk degrading the quality of human life, the health of the natural environment, and the vibrancy of the global economy. In fact, at the current pace of investment, net zero emissions would be attainable only by 2069—almost 20 years behind the target.
Financial Markets
1. The Dow Jones Industrial Average rose on Friday, notching its best month since January.
The blue-chip index closed 272 points, or 0.8%, higher at 34,098.16. The S&P 500 added 0.83% to finish at 4,169.48. The Nasdaq Composite advanced 0.69% to end at 12,226.58 as investors parsed the latest crop of technology earnings. The Dow finished April 2.5% higher, its best monthly showing since January, when the average ended up 2.8%. The S&P 500 logged a 1.5% monthly gain — its second positive month in a row — while the Nasdaq ended the month only slightly higher. On a weekly basis, the Nasdaq saw the largest gain, at 1.3%, in what was considered Big Tech’s marquee earnings week. The Dow and S&P 500 each finished the week about 0.9% higher. Just over half of S&P 500 companies have reported earnings thus far. Of those companies, 80% have beaten expectations, according to data from FactSet. That beat rate is roughly in line with a three-year average, according to data from The Earnings Scout.
2. While April may bring snow, the winter for bond markets appears to be in the past.
Following a period of two years in which investment-grade bonds suffered losses, the Bloomberg Barclays Aggregate Bond Index – which represents the vast and investible US bond market – has recorded positive growth this year. The Federal Reserve’s rate hikes have brought an end to the bull market in bond prices that had persisted since 1982. In 2022, the focus of the Fed’s policies shifted from supporting markets to combating inflation, resulting in negative reactions from the bond markets. Nevertheless, this year’s recovery is not unexpected, as historical trends have shown that bond prices tend to recover after losing years.
As the investment climate evolves, bonds may present an attractive long-term investment option, and they may also serve as a strategy for managing potential recessions. Recessions are periods characterized by economic contraction, declining corporate profits, rising unemployment rates, and reduced access to credit for businesses and individuals. Historically, US stock markets have experienced an average decline of 15% per year during recessions since 1950. In contrast, bonds have historically performed well during these periods, delivering higher returns than stocks or cash. This is partly due to central banks’ rate cuts aimed at stimulating economic activity, which typically lead to falling bond yields and rising bond prices.
3. Impax receives a Morningstar ESG Commitment Level of Leader.
Impax Asset Management, a specialist asset manager that invests in the transition to a more sustainable global economy, has received the Morningstar ESG Commitment Level of Leader. Its Pax Large Cap Fund (PXLIX) was named Active ESG Mutual Fund of the Year at the 2022 With Intelligence Mutual Fund & ETF Awards. This places Impax among the highest-rated asset managers out of the 94 evaluated by Morningstar. Morningstar’s ESG Commitment Level is a qualitative rating that expresses the determination of asset managers to incorporate ESG factors into their investment processes and strategies compared to their peers. The rating is based on a range of Low, Basic, Advanced, and Leader. Morningstar highlights Impax’s well-thought-out and comprehensive approach to sustainable investing, experienced resources, and strong active ownership practices as key factors in awarding the Leader rating. Founder and Chief Executive of Impax, Ian Simm, expressed his delight at the recognition, stating that Impax’s commitment to integrating ESG thinking into all stages of the investment process allows them to identify opportunities and manage portfolio risk more effectively.
4. More than a third of the members of the S&P 500 are expected to report results during the week of April 24, according to S&P Global Market Intelligence data.
Analysts expect only three of the 11 sectors in the S&P 500 will post year-over-year increases in EPS this earnings season. The consumer discretionary, industrials and energy sectors are all expected to post gains. Meanwhile, quarterly EPS in the real estate and materials sectors are forecast to fall by more than 25% year over year.
5. Microsoft shares rose 9% in extended trading on Tuesday after the software maker issued fiscal third-quarter results and quarterly guidance that exceeded analysts’ predictions.
For the fiscal fourth quarter, Microsoft finance chief Amy Hood called for $54.85 billion to $55.85 billion in revenue, during a conference call with analysts. The middle of the range, at $55.35 billion, implies 6.7% growth, topping the $54.84 billion consensus among analysts surveyed by Refinitiv. Hood is bullish on artificial intelligence.
6. Eli Lilly and Company closed nearly 4% higher at $390.35 a share on Thursday.
The company booked net income of $1.3 billion, or $1.49 per share, for the quarter, a decrease of 29% compared with the first quarter of 2022. Eli Lilly raised its guidance for the year due in large part to the U.S. dollar weakening against major currencies. It said it expects revenue of between $31.2 billion and $31.7 billion, compared with its previous projections of $30.3 billion to $30.8 billion. The company increased its adjusted earnings guidance to $8.65 to $8.85 per share for the year, up from $8.35 to $8.55.
7. Shares of First Republic are reeling again after the struggling lender on Monday reported a $100 billion drop in customer deposits during last month’s banking turmoil.
The stock was temporarily halted for volatility as it fell about 38%, putting it just under $4 a share. It’s on pace for yet another record low, based on Dow Jones Market Data going back to 2010. For the year, the stock is down roughly 97%. The declines come as federal regulators released their postmortems of their oversight of Silicon Valley Bank and Signature Bank today.
8. ResMed Inc. announced results for its quarter ended March 31, 2023, yesterday and the price is surging over 7% on Friday morning.
Revenue increased by 29% to $1,116.9 million; up 31% on a constant currency basis. Gross margin contracted 150 bps to 55.3%; non-GAAP gross margin contracted 200 bps to 56.1%. Income from operations increased 28%; non-GAAP operating profit up 27%. Operating cash flow of $282.6 million. Diluted earnings per share of $1.58; non-GAAP diluted earnings per share of $1.68.
Sources:
(1) www.cnbc.com
(2) www.spglobal.com
(3) www.bls.gov
(4) www.mckinsey.com
(5) www.wsj.com
(6) www.earthday.org
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. Economic forecasts set forth may not develop as predicted.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.
Investing in stock includes numerous specific risks, including the fluctuation of dividends, loss of principal, and potential illiquidity of the investment in a falling market.
Investing in foreign and emerging market securities involves special additional risks. These risks include but are not limited to currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks.
Investment advice offered through Private Advisor Group, a registered investment advisor and separate entity from The Legacy Foundation.
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