On Air with Altair: 1Q 2023 Market Review Video
Want to hear Altair’s analysis of the markets, but do not have the time to read all of Altair Insight? Watch our video summary of the report or listen to the podcast episode and get caught up on our market review in 3 minutes.
BANK TUMULT BROUGHT UNDER CONTROL
The regional bank scare that jolted markets and depositors’ confidence in March has led to tighter lending conditions, and additional repercussions are likely. Besides the potential for further upheaval among small and midsize banks, lending, economic growth and employment all are likely to be affected. However, the biggest takeaway from the three banking collapses is that this event never came close to triggering a systemwide disaster, as some initially feared. The system remains stable thanks to federal regulators limiting the damage with a multibillion-dollar rescue. We believe the risk for broad contagion remains low.
FED CONSIDERS A PAUSE
The banking crisis did appear to contain a silver lining: aiding the Federal Reserve’s anti-inflation drive by likely cooling the economy further. We now expect the Fed to put its rate-hike cycle on hold after a final quarter-point increase this week. We do not believe the Fed will cut rates this year, however. There is good reason for interest-rate increases to be put on hold. Headline inflation has fallen to 5 percent – down from 6½ percent at the start of the year. And available evidence suggests material cooling of inflation in the months ahead.
ECONOMY HOLDING UP
For all the speculation about a future recession, the U.S. economy remains in good shape. Strength in the labor market and among consumers offsets weakness in housing and manufacturing, enabling modest economic growth. Globally, the economy faces what the IMF describes as a thickening fog amid pressure from higher rates, inflation, the war in Ukraine and stress in the financial sector. The health of corporate earnings will likely determine whether the U.S. economy maintains its resilience. S&P 500 companies are projected to post a second straight quarter of declining profits. With earnings season well under way, projected profits are on track to be down 6% from a year ago but off to a better start than expected. The earnings decline is estimated to be short-lived, with growth returning in the back half of this year.
The economy will likely come under more stress in future months due to the lagged impact of higher interest rates and additional fallout from the banking issues. But if a recession does occur – and that is far from certain – we believe it will be mild. Stocks should move higher if the earnings trough is contained, as we expect, and bonds’ outlook remains positive.
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