Vigilare Wealth Management 2023 Q1 Commentary
The year started with a market bounce. This was in contrast to this past fall when not even Santa Claus could deliver a year end market gift. Signs of recession fatigue are starting to creep into the minds of investors and in the opinions of the financial media. This should be expected, as the year 2022 saw “recession” appear in over 600,000 headlines.
Historically, pre-recession bounces are very common and recession anticipation can be like watching water boil or paint dry. Complacency can start to set in at just the wrong time (E.G., 2001, 2007). Being a risk-management minded student of market history can help navigate through these ambiguous times.
Market and economic data suggest the probability of a slowdown has continued to increase. Look no further than the shockingly abrupt failure of two distinguished regional banks. These are not isolated events, but symptoms of broader stresses that have been put on the economy. The regional banking system is not small. Regional banks make up about half of total domestic bank assets. (A recent study concluded that if half of uninsured bank deposits left the banks that over 190 U.S. banks would face risk of impairment and bank failure. Ultimately, the U.S. Government may have to raise the FDIC limits to prevent future bank runs.)
Sharp rising interest rates, a slowing economy, and now tighter bank lending conditions are going to continue to be economic headwinds into the foreseeable future. This along with persistent inflation makes it challenging for the U.S. Federal Reserve (the Fed) to simultaneously bring down inflation and keep the economy growing. These inflationary challenges have not been this prominent in over 40 years.
The stock markets have proven resilient. Market participants have been conditioned try to “game” the end of the current rate hike cycle to anticipate ensuing market rallies. This can be a treacherous endeavor given the long and variable lags in fed policy and the inflationary backdrop. Not to mention the market is historically overvalued on most every metric.
As we wrote in our prior commentary, we do believe that inflation is peaking and that the focus will shift to how sharp of a slowdown there is along with the ongoing Fed policy of pushing rates higher. There is a saying that the Fed raises rates until something “breaks”. We will be watching closely. There are no certainties and data can adjust and shift quickly, both positively and/or negatively.
We want to reiterate some words from our last commentary as not much has changed: Flexibility and nimbleness will prevail over a strong conviction of a singular outcome. If we can summarize the strategy for early 2023 in one word, it would be “Patience”. We believe this virtue will be rewarded.
Thank you for your trust.
The Vigilare Wealth Management Team
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