March 2023 Monthly Recap
Market Snapshot
*As of 03/31/2023
By the Numbers
  • At its recent March meeting, the Fed announced that it would raise rates another 25 basis points, pushing the fed funds rate to a range of 4.75% to 5.00%. They did this in spite of the recent runs on banks, reiterating that “the U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation”.
  • The Fed also published its Summary of Economic Projections which showed that officials expect growth to slow to 0.4% in 2023, unemployment to rise to 4.5% (from 3.6% today), and PCE inflation to decelerate to 3.3% (from 5.4% today). Fed officials also expect the fed funds rate to rise by another 25 basis points and remain there the rest of the year.
  • Within the S&P 500, regional bank stocks have struggled, falling 34% year-to-date and the broader financials sector has declined 9.4%. Meanwhile, the broader S&P 500 has gained 3.4%. This is because sectors such as Information Technology and Communication Services have risen 17.5% and 18.4%, respectively, over this same period.
  • An important driver of the 2023 gains in the tech sector has been the decline in interest rates, despite ongoing Fed rate hikes. This has helped re-establish the negative correlation between stocks and bonds that have helped long-term investors for over four decades.

What do investors need to know about tightening financial conditions as they stay invested for the long run?

Banking Impact The Fed’s view is that the problems in the banking industry will naturally tighten conditions, reducing the need for larger rate hikes. Despite the many calls for the Fed to cut rates, part of the Fed’s calculus is likely that overreacting to these banking problems would spark more panic, not less.

Fighting the Fed? The current Fed position is at odds with what the market expects. Fed funds futures show that investors believe the Fed might hike again in May, but will need to begin cutting rates soon after. Over the past year, the market has arguably been ahead of the Fed. Thus, despite what the Fed might do in the coming months, it is likely that we are in the midst of an inflection point in financial conditions.

Easy Money It appears that the economy is experiencing a hangover from the easy money policies of the past 15 years. Loose monetary policy can spur asset bubbles, and this arguably occurred in startups and crypto. This echoes historical episodes during which Fed rate hike cycles led to financial instability whether in banks or across companies and countries that depend on cheap financing.

Thus, the current banking crisis is only one of the repercussions as the monetary tide has gone out. While this is still playing out and it’s unclear how at-risk regional banks and large European banks may ultimately fare, the situation has also re-stabilized considerably. The problems at Silicon Valley Bank were somewhat unique to their niche business model; regardless, the actions taken by the Fed & US Treasury have largely solved parallel issues for other regional banks.

Chart of the Month

Markets expect the Fed to cut rates later this year.

Sources: Clearnomics, Bloomberg, Morningstar, Department of Treasury and
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