Quarter one is in the books. In the face of a constant deluge of seeming lousy news, you may be surprised that your investments are most likely positive for this year (though not enough to make back 2022's losses). Further, the second quarter has started off in the right direction as well.
Despite a few banking failures, the market's attention has returned to the familiar main attractions of the last few years, inflation and the Fed's reaction. We see continued signs that the Fed's tightening stance is having impacts. Additionally, the issues in the banking world will likely result in further tightening outside of the Fed as banks pull back on lending.
While this may mean that the Fed may pause on rate increases sooner than expected, for now, the Fed played it safe and went with a 25-basis point hike at the March meeting.
Let's get into the data:
- 12-month CPI was 5.0% in March. For March, prices barely rose, gaining just 0.1% in March and 5.0% over the previous 12 months, compared to 6% in February. The inflation figure was at the low end of expectations.
- The Producer Price Index fell 0.5% in March. PPI is a measure of inflation from the perspective of businesses. Prices businesses pay impact prices consumers pay, and so a report like this that came in significantly lower than expected is positive news. The market reacted with a big up day when the news came out.
What Does the Data Add Up To?
The impact of bank failures will take a while to be fully felt in the economy. The pullback in lending is likely already underway as banks risk off and shore up their balance sheets. Further, there are likely to be new or expanded regulations on banks.
With the rate increases over the last year or so, cash instruments pay real money now. As a result, yield shoppers are moving in massive quantities from banks that still pay practically nothing to products that offer good yields (quick tip, you should be yield shopping too, don't accept that below 1% interest rate from the local credit union or big bank when there are plenty of options that pay well over 4% now). Of course, this rapid movement of money is adding to the banking issues.
Deposits have taken a hit for smaller regional banks, and money has moved either to bigger banks or to money market funds, which have experienced large inflows. Moreover, it may engender another round of bank consolidation, as smaller banks either merge or get bought up by bigger banks.
What does this mean for the Fed? Chairman Powell quantified the impact of bank stress and tighter credit as "the equivalent of a rate hike or perhaps more than that." However, he still increased by 25 basis points at the last meeting. Most Fed officials – 10 out of 18 – expect only one more rate increase this year.
- The S&P 500 is up 8.67% YTD
- International Index (MSCI EAFE) is up 10.70% YTD
- Barclays Aggregate Bond Index is up 2.48% YTD
The Smart Investor
- Tax season can be exhausting even for people who aren't CPAs. But before you put those tax thoughts away for another year, take a minute to see if you can do anything differently for next year.
- Are you taking advantage of tax-efficient savings in HSAs, FSAs, and retirement plans?
- How about savings for kids' college? 529 College savings accounts offer tax-free growth.
- Are you setting up lower taxes in retirement by converting to a Roth account?
- Are you taking advantage of the spousal IRA provisions if only one spouse works?
- How about charitable giving? Getting a plan in place now can eliminate year-end scrambling
- Are you planning any asset sales this year? What will be the tax impact?
I know we want to put the tax folder away and ignore it until this time next year, but tax planning is an ongoing process. The goal for tax planning isn't to lower your taxes in any year – it's to plan ahead and pay as little in taxes as possible both now and throughout your life to keep as much as is legally possible and pass on the most to loved ones.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities that represent the stock market in general. The Bloomberg Barclays US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate-term investment-grade bonds traded in the United States and is used for measuring the performance of the US bond market. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.
This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website. River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results.