April 17, 2023
If It’s Broken, It Can Be Fixed
What a tightrope the Federal Reserve is walking! After a belated Federal Reserve rate hike cycle (remember, “transitory inflation”?), the Fed has been playing catch-up for much of the past year. The goal, of course, is to tame inflation while avoiding a recession. However, in the March minutes of their meeting, even the Board of Governors of the Federal Reserve acknowledged that a third quarter recession is a likely outcome. The tightrope, then, has become how to make any recession as painless as possible.
In the first quarter of 2023, the tightrope got even shakier. Wall Street often says that “the Fed will raise rates until something breaks,” and in Q1 we saw the second largest bank collapse in domestic history when Silicon Valley Bank (SVB) was shuttered midday on a Friday. Signature Bank and Credit Suisse (a 166 year old bank) also subsequently failed. While these banks shared a common thread of very poor risk management, they were also victim of rapidly rising rates. Specifically, depositors moved their money out of very low yield savings accounts and into far higher yielding instruments like a money market fund. This should not be a surprise; at Cutler we have been actively advising clients to move cash into higher yielding alternatives to savings accounts.
While the initial reaction to this bank run was broad selling in stocks, swift moves to backstop banks provided some stability. The Fed had enough confidence in these backstops to raise rates again in March, believing that the risks of higher inflation outweighed a precarious economic outlook. With interest rates pricing in a recession later this year, rate expectations are near their peak, and lower rates are forecast beginning this summer.
The possibility for lower rates has led to a big rally in Growth-style stocks. The tech-heavy Nasdaq 100 index has led the way higher. Why has that index rallied so strongly? Partly because the “tech giants” were beaten down so hard in 2022, and partly because there is a trend towards viewing these mega-cap companies as a flight to “safety”- while they can trade at high valuations and be quite volatile, they can also offer wide moats to competition and strong pricing power. How narrow is the stock leaderboard? Only 3 out of 11 sectors outpaced the broad S&P index in the first quarter, and those sectors are highly concentrated as follows:
Past performance is not indicative of future results. Strategies referenced herein may be materially different than actual positions held in client accounts. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be profitable or suitable for a particular investor's financial situation or risk tolerance. Investing involves risk, including loss of principal. You cannot invest directly in an index. Asset allocation and portfolio diversification cannot assure or guarantee better performance and cannot eliminate the risk of investment losses. Neither Cutler Investment Counsel, LLC nor its information providers are responsible for any damages or losses arising from any use of this information.
The S&P 500 Index is widely regarded as the best single gauge of large-cap U.S. equities. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
The Barclay's Aggregate Bond Index (Taxable Bond) is a broad base, market capitalization weighted bond market index representing intermediate term investment grade bonds traded in the United States.
Headline Inflation is the raw inflation figure reported through the Consumer Price Index (CPI) that is released monthly by the Bureau of Labor Statistics.
The Bloomberg Commodity Index (Commodities) is an index of the prices of items such as wheat, corn, soybeans, coffee, sugar, cocoa, hogs, cotton, cattle, oil, natural gas, aluminum, copper, lead, nickel, zinc, gold and silver. The index is calculated on an excess return basis and reflects commodity futures price movements.
The MSCI EAFE Index (Foreign Developed Index) is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
The MSCI Emerging Markets Index captures large and mid-cap representation across 27 Emerging Markets (EM) countries. With 1,392 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
Bitcoin Each crypto index is made up of a selection of cryptocurrencies, grouped together and weighted by market capitalization (market cap). The market cap of a cryptocurrency is calculated by multiplying the number of units of a specific coin by its current market value against the US dollar.
Source: Morningstar All opinions and data included in this commentary are as of March 31, 2023 and are subject to change. The opinions and views expressed herein are of Cutler Investment Counsel, LLC and are not intended to be a forecast of future events, a guarantee of future results or investment advice. This report is provided for informational purposes only and should not be considered a recommendation or solicitation to purchase securities. This information should not be used as the sole basis to make any investment decision. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed.
These blogs are provided for informational purposes only and represent Cutler Investment Group’s (“Cutler”) views as of the date of posting. Such views are subject to change at any point without notice. The information in the blogs should not be considered investment advice or a recommendation to buy or sell any types of securities. Some of the information provided has been obtained from third party sources believed to be reliable but such information is not guaranteed. Cutler has not taken into account the investment objectives, financial situation or particular needs of any individual investor. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor's financial situation or risk tolerance. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary. No reliance should be placed on, and no guarantee should be assumed from, any such statements or forecasts when making any investment decision.