- Today’s higher rates are definitively slowing the growth rate of our economy yet unemployment remains near 50-year lows.
- We do not believe today’s stock market valuations have accurately reflected the decelerating earnings expectations. Only eight stocks of the 500 in the S&P index are responsible for the positive year-to-date returns this year. We expect stock market returns will struggle in the upcoming months as earnings forecasts continue ratcheting lower.
- Our Pacific Wealth Management investment portfolios remain defensively positioned with an emphasis on wealth preservation. Our large cash allocations underscore our prudently cautious posture.
Today’s financial markets are navigating the latest chapter in the ongoing COVID saga. For many reasons, the world’s fiscal and monetary response to the pandemic resulted in very strong economic growth. The resultant inflation and high-interest rates remain the global markets’ primary focus.
After stocks and bonds declined to annual lows in the fall of 2022, financial markets began moving upward as they anticipated an end to interest rate increases. Today’s higher rates, however, are definitively slowing our economic growth despite American corporations adding 311,000 jobs in February, following 504,000 new jobs in January. Current unemployment is at the lowest levels we have seen since 1969.
Although inflation has declined from its peak in June of last year, it continues to remain persistently high. We do not believe today’s stock market valuations have accurately reflected the decelerating earnings expectations. Only eight stocks of the 500 in the S&P index are responsible for the positive year-to-date returns this year. The recent instability in the banking industry has shifted perspectives in the bond markets. Jerome Powell just announced the Federal Reserve Bank increased the Fed Funds rate another 25 bp to the 4.75-5.0% target, while assuring markets the U.S. banking system is strong and resilient. Powell’s comments and our central bank’s latest increase in interest rates reinforced their top concern remained focused on inflation rather than the credit risk of our slowing economy and banking industry stress. At this point, the issues within Silicon Valley Bank and Signature Bank do not appear to be widespread to the rest of the banking sector. More information is likely to come to light with time that may impact stocks and other risk assets for the positive or negative. In the meantime, we are encouraged by the prompt and aggressive action taken by regulators to protect depositors.
Geo-political tensions between the U.S. and China appear to be on the rise but seem unlikely to materially impact the global economy. Our polarized American political climate is sure to provide additional drama. The outlook for the U.S. economy remains cloudy as the year advances. We expect the stock market to struggle in the upcoming months as corporations continue to project lower earnings.
Our Pacific Wealth Management investment portfolios remain defensively positioned with an emphasis on wealth preservation. Our large cash allocations underscore our cautious posture. Please let us know if you have any concerns or questions regarding your investments or news of the day.