If there’s such a thing as the opposite of the beginning of 2022 for markets, that’s exactly what happened in the first quarter this year. The S&P 500 gained 7.5%, and the NASDAQ jumped 20.8% after a very difficult 2022 for both. Bonds gained modestly last quarter after, quite literally, their worst year ever (keep in mind that bond declines due to rising interest rates are eventually recouped by investors who hold them to maturity, which we do). 

Some of the recent enthusiasm was driven by softer economic data for certain segments of the economy, suggesting Fed action to-date is working. It seems ridiculous to rally on bad news, but economic weakness likely pulls forward the end of the tightening cycle, which investors like. Chairman Powell, in his last press conference, finally opened the door to a “pause” if the data warrant it. The Silicon Valley Bank collapse didn’t happen until after that meeting. Had Powell already seen SVB’s failure and the aftermath for bank stocks, his outlook and answers likely would have been different. We’re planning a blog post analyzing SVB’s implosion as we understand it and what it means for bank investors and depositors. 

We talk a lot about the Fed and where it is in the current cycle because markets seem laser-focused on it, above all else. The Fed is walking a very fine line – hiking rates enough to quash inflation without tipping the economy into a profit-crushing recession. We think the Fed was already within one or two meetings of announcing no increase in their target (i.e. a pause). In the wake of the Silicon Valley crisis, banks themselves have tightened lending standards, which will impact the economy just as 3-4 additional quarter-point increases from the Fed would. Chairman Powell knows this, so our best guess is that the long-awaited pause arrives next month. If not, we’re still very close to the end, and that market headwind will diminish soon. Focus will shift next to corporate profits and whether the Fed has already done too much.  


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