14 May 2023

Before you go away…

By Matthew McKee, CFA, CFP® and Adrian Colarusso, CFA, CFP®

May 14, 2023

Last week, we had a wonderful time at the Arm in Arm Spring Benefit. It’s a non-profit Adrian has been involved with for several years, and we care deeply about its mission to provide food, housing, and job training to neighbors in need.

Why do we care so much about non-profit organizations? One reason is that our clients do. They are prosperous, purpose-driven individuals and families who care about how their wealth shapes the world. And, like us, they have a desire to support non-profits as tax efficiently as possible.

On Sunday, June 11 at 4pm, Target Rock will host an educational event on Tax-Efficient Charitable Giving at Springdale Golf Club in Princeton, NJ. More details to come.

Now, into the headline of this email.

There’s an old saying “sell in May and go away”.

As we aren’t proponents of market timing, we prefer “hold in May and go away”. We don’t want our clients worrying about day-to-day market movements as they prepare for their summer break.

Here’s what we’re paying attention to.

After 10 consecutive rate hikes, it appears we are nearing the end of the Fed’s tightening cycle. However, the effects of the hikes may not have been fully felt yet. While inflation does show signs of slowing, 4.9% is well above the Fed’s 2% target, and it’s possible that prolonged elevated interest rates will harm the economy.

The brinksmanship in Washington over the debt ceiling has some investors concerned. We believe this is a noisy game of chicken. The ramifications of default would be so dire that game theory all but assures that the debt ceiling will be raised.

There’s also the continued regional bank stress. The latest victim, Pac West, saw its shares down sharply on Thursday after a reported loss of 9.5% of its deposits.

There are some bright spots. Earnings came in slightly better than expected, inflation appears to be easing, and the labor market is strong (but not too strong to propagate further inflationary pressure).

In the Fed’s May 3 statement, Chairman Powell remarked “I continue to think that it’s possible that this time really is different… Avoiding a recession is, in my view, more likely than having a recession.”

If you’re concerned your portfolio isn’t aligned with these dynamics, give us a call.

Company Earnings Down but Not as Much as Expected

Earnings season is wrapping up after a couple of busy weeks. So far, about 85% of the S&P 500 companies have reported earnings. Overall, revenue was up 3.9%. However, earnings are down -2.2%. This is the dynamic we were concerned about at the beginning of the year. Further declines are possible as companies face higher labor and borrowing costs.

Inflation Moderating but Still Above Target

The April CPI report was released on Wednesday showing a rise of 0.4% from the previous month and 4.9% from the same period last year. Lower energy prices, which declined ~5%, contributed to the improvement.

Inflation appears to be moderating but is still well above the Fed’s targeted 2%.

GDP growth for the first quarter was 1.1% annualized, lower than the historical trend. This might indicate that consumers, whose spending represents approximately 70% of the economy, may be feeling the effects of inflation.

If prices continue to moderate, this will give the Fed a little flexibility in its policy, allowing it to ease sooner, which may buoy asset prices.

Interest Rates – Peak or Plateau?

The CME FedWatch Tool went from a 0% chance of a June rate hike the previous week to a 7% chance Friday, April 5th after a strong April Payrolls report and sits at 13.1% as of the time of writing. Interestingly, investors are expecting rate cuts later in the summer or early fall.

The Fed Funds rate sits at its highest level since 2006 after 10 consecutive rate hikes. Elevated rates are affecting consumers’ saving and borrowing decisions. Clearly, we have seen some associated repercussions in the banking sector and expect more collateral damage in other sectors as companies’ debt is refinanced at higher rates over the coming years.