Recent headlines may be raising questions about what’s ahead for your investments and the economy.
Here’s the good news: the key factors driving fundamental changes in financial markets—namely, the state of the U.S. economy and, more specifically, the job market—are the same as they were before the recent news. Meanwhile, the regional banking industry in aggregate is well-capitalized, well-diversified and maintains good liquidity.
But storm clouds are still brewing.
The economy is walking a tightrope
The truth is, even in light of recent financial events, the U.S. economy is walking the same balancing act that it was in March 2022, when the Fed first began raising the Federal Funds rate after the pandemic. Raise rates too slowly and risk inflation staying high, which would continue to negatively impact consumers and businesses. Raise rates too quickly and risk recession, which, of course, would also hurt consumers and businesses.
Let’s be honest here: the most recent inflation data was disappointing. Core inflation rose 0.5% in February, above expectations. And when you start looking at the details of the report, it becomes clear that we’re seeing a continuation of the same issues that we’ve seen the last couple of months: services-based prices such as airfare are still way too high because of the cost of labor. Even some prices of goods—such as new cars, furniture and apparel—have increased over the last couple of months because of continued strong demand for furniture and apparel and short-term disruptions in new car production.
Meanwhile, the most recent labor market data is a mixed bag. On the plus side, some people are seeking to return to the workforce, which ticked up unemployment but should help bring inflation down on the services side. Still, the 10.8 million job openings outnumber the amount of unemployed people who are looking for work by 2:1. That means there is a long road ahead before wages—and services inflation—come down.
That said, with the Federal Open Market Committee’s March 21-22 meeting approaching, many may be wondering if it’s counterproductive for the Fed to raise rates again at the same time it’s supporting banks that need short-term liquidity. (The Fed is offering banks the option to pledge securities to it at par value in exchange for cash, similar to a loan with collateral).
I think we’ll see the Fed using the power of its communication to assure markets that it will remain vigilant and focused, and that ultimately the Fed will achieve its 2% inflation goal—but that it doesn’t want to cause a financial crisis to get there.
What this means for your investments
Even though the economic big picture remains the same, the recent news surrounding some areas of the banking industry have impacted financial markets.
In the really short term, mid-cap and small-cap stocks are down because of their higher percentage makeup in the financial sector. Meanwhile, gold prices have picked up because of the idea that it’s a “safe haven” and the belief that the Fed will have to cut rates later this year.
Cryptocurrency has picked up with Bitcoin in particular rallying hard, but I think this will be short-lived. This rally stems from the perspective that the short-term liquidity that the Fed is offering banks amounts to quantitative easing, which would support riskier investments such as crypto. However, while it is true that the size of the Fed’s balance sheet likely will grow a little because of the move, the Fed probably will become more hawkish as concerns about the financial industry decrease.
In the longer term, it’s important to remember that, even with as much volatility as we’ve seen in the markets, balanced portfolios that are diversified across stocks, bonds and cash are mostly up year to date (through Mar. 14, 2023). Being strategically overweighted in high-grade bonds has helped because, when investors are concerned about the economy they flock to “safety investments” like these, which brings up the prices of these assets. Carrying higher cash balances has also aided returns, as the liquidity can facilitate taking advantage of short-term volatility in the markets.
Looking broadly at equity markets this year, international equities have been one of the better performers. Although Europe experienced an energy crisis last year and European economies struggled, these economies have not fared as poorly as anticipated (or what markets were pricing in). China reopening has been positive for international equities, as well as the euro and Japanese yen appreciating relative to the U.S. dollar.
Large-cap U.S. stocks are also up because the domestic economy is still growing. Some of the areas that are performing the best are technology and communication services stocks, while energy, utilities and health care stocks are down.
Of course, all this could change rapidly, given the volatility of the markets. We continue to monitor the situation closely.
The information provided is intended to be educational in nature and not advice relative to any investment or portfolio offered through any subsidiary of BOK Financial Corporation (BOKF), a financial services holding company (NASDAQ:BOKF). The views expressed reflect the opinion of the authors based on data available as of the date published and are subject to change without notice. These statements are not a complete analysis of any sector, industry or security. Individual investors should consult with their financial advisor before implementing changes in their portfolio based on opinions expressed. The information provided is not a solicitation for the investment management services of any Investment subsidiary.