Market Monitor: 4% Is Not Good Enough

Market Monitor: 4% Is Not Good Enough

June 21, 2023

By the end of May, the debt deal was hammered out and on its way through Congress to end up on the president's desk before "X-Date" when the Treasury ran out of money.

The negotiations suspended the debt ceiling until January 2025, and both sides agreed to flat non-defense government spending in 2024 and a cap of 1% in spending increases on government spending in the fiscal year 2025.

As that deal passed, market attention has refocused on the old familiar themes, at least for now, until the next crisis, real or fake, comes along.

Let's get into the data:

  • 12-month CPI was 4.0% in May:That’s a far cry from the 8.6% inflation rate we had at this time last year.
  • Europe enters a recession: The euro economy shrank -0.1% in the fourth quarter of 2022 and shrank -0.1% in the first quarter of 2023, marking two straight quarters of negative GDP (still the definition I think of for a recession). While it does count as a recession, it is extremely mild.
  • May non-farm payrolls of 339,000 brought the heat.The Bureau of Labor Statistics report was the highest monthly number since January.

What Does the Data Add Up To?

The Fed finally paused rate hikes at the last meeting, but they left the door open for future hikes and even indicated they think they will be needed. While 4% inflation is a significant improvement from last year, it’s still quite above the Fed’s target. Since March of last year, the Fed has increased rates rapidly, slowing down the size of the hikes starting at the end of last year. To us, this pause feels like the natural next progression.

March 17th, 2022 -increased 0.25%
May 5th, 2022 -increased 0.5%
June 16th, 2022 -increased 0.75%
July 27th, 2022 -increased 0.75%
September 21st, 2022 -increased 0.75%
November 2, 2022 -increased 0.75%
December 14th, 2022 -increased 0.5%
February 1st, 2023 -increased 0.5%
March 22, 2023 -increased 0.75%
May 3, 3034 -increased 0.25%
June 14th, 2023 -increased 0.25%

In his statement and press conference, Fed Chairman Jerome Powell reiterated that the goal is to get inflation back down to 2%. The historically fast pace of rate hikes over the last year is the Fed trying diligently to tamp down economic growth to control inflation. It feels like we are towards the end of the hiking cycle, if not at the end. The next million-dollar question will become, how long does the Fed keep us at these high levels? And that’s a tough one to answer.

Markets through June 16th

  • The S&P 500 is up 15.78% YTD
  • MSCI EAFE (International) is up 13.65% YTD
  • Barclays US Aggregate Bond Index Is up 2.22% YTD

The Smart Investor

At the beginning of the year, we resoundingly heard negative reports on the economy's direction and heard the anxiety from the people we talk to and the clients we work with. Yet, the markets so far are having a strong year. We bring this up to underscore a point we regularly make: it is very difficult to consistently time the markets. The rest of the year very well may realize those earlier fears, or we may continue the current winning streak.

It's important to remember that in the grand scheme of things, our long-term performance makes the primary impact, not the performance month over month, quarter over quarter. If you were worried at the beginning of the year, hopefully, you feel pretty good about your decision to stay disciplined and invested right now. As always, if you have questions, shoot us a message.

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.