Market Musings 3/7/2023

Quick thoughts on the markets and major portfolio news. Not on Ursa yet? Download Ursa from the App Store!

Fed throws cold water on the new year’s rally as inflation declines slow and rate expectations rise…

February saw the S&P 500 pull back -3% after running +6% in January. Slowing #InflationFears declines and continuing strength in #LaborMarkets stymied the end of #RisingYields optimism in February.

At the start of February, the first Fed meeting of the year only reinforced the sentiment. The meeting concluded with a 25bps rate hike further decelerating the pace down from 50 in Dec and 75 in Nov. While Powell did caution more hikes likely coming, investors were already cheering the end of #RisingYields in June and even potentially earlier in May.

However, multiple new data points came in just too hot. In #LaborMarkets, the US added 517K jobs in January (far exceeding expectations for 187K) and unemployment fell to 3.4% (lowest since 1969). Meanwhile, January Retail sales were up 3% and Wholesale pricing was up 0.7%-both were above expectations. While potentially enabling a softer #Recession2023 landing, the persistently strong economy also likely forces more aggressive #RisingYields.

And then came the decelerating inflation declines. January CPI only slightly fell to 6.4% Y/Y from 6.5% in December with forecasts considerably lower at 6.2%. Then, the PCE (the other inflation measuring stick) was up 5.4% Y/Y and increased 0.6% M/M in January (the first uptick in 7 months). While initially starting with a +3% gain, stubborn #InflationFears reversed the bullish sentiment with the S&P 500 ending February down -3%.

March kicked off with a glimmer of optimism following some dovish commentary by the Atlanta Fed President. However, that bullish sentiment was shut down by Powell in his Senate Banking Committee testimony. Likely accounting for the new data in Feb since the last meeting, Powell noted rates likely to be higher than previously anticipated and potentially increasing the rate hike pace again. While we think it’s unlikely, it appears 50bps hikes are back on the table. However, we do believe that #RisingYields are now likely to continue into the summer instead of ending in the spring.

Overall, we’ve been relatively cautious on the market euphoria swings. We’ve always been believers that the Fed will overcorrect on #InflationFears after botching the start in 2021. We were surprised with the Fed’s hike dropping to 25bps in early February, but seems like the Fed is second guessing themselves now as well. Despite the macro sentiment swings, our #Flight2Safety Value positioning continues to pay off for our portfolios into March.

While not there quite yet, we believe we are near the bottom of this bear market cycle. We would recommend taking advantage of any pullbacks to add to portfolios.

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The statements, opinions and analyses presented here are provided as general information. This article is the opinion of the author. Anything within this article should NOT be considered an investment recommendation or advice. See Ursa’s full disclosures here.

Original Photo by Pixabay.