19 May 2023
The Fed gets a breather
For the time being, attention has turned from the Fed, and all eyes are on the President and Congress, as the game of chicken regarding the debt ceiling takes us perilously close to the unthinkable. And with the headline inflation print coming in at 4.9%, below March’s 5.0% number and slightly below expectations, it does appear that the heavy lifting by the Fed is behind us. In fact, the futures markets are assigning a 91% probability that Powell and Co. will be in easing mode by December, reflecting growing evidence of a slowdown that can be seen in both business and consumer sentiment. Curiously, while small business optimism is near a decade low, job openings at those very same companies remain near their all-time highs.
Source: NFIB
For the gainfully employed, job switching and the newfound flexibility that many positions now offer, post-pandemic, has led to the happiest workforce in history, which would seemingly be a boon for productivity going forward. As higher productivity is anti-inflationary, that would help support the “easing” scenario, although, to be fair, output per hour in recent quarters has been stuck in the red, so the happiness = productive concept may be more theoretical.
After two months of declines in retail spending, the consumer bounced back in April, with growth in auto sales and dining out, according to the Commerce Department. So while economic growth may be waning, there is still hope for the soft landing scenario.
Thus far in May, the smallest names, which have struggled year-to-date, are rebounding, with the Russell Microcap Index up 2.4% through the 17th. Growth stocks across the market cap spectrum are also having a solid month, with large-cap growth stocks up about 2% and small-cap growth names gaining about 1%. With better-than-expected Q1 earnings, analysts are starting to lift their second-half earnings estimates, which is certainly giving equities a boost. But on the other end, REITS (-2.5%) continue to suffer in what is an increasingly difficult environment, especially for the office sector.
In the bond market, the yield on the 10-year Treasury is at 3.57%, which is about where it began the month, but despite what that may imply, the month of May has not been kind to fixed-income investors. The overall market is down 0.9%, and every major fixed-income sector is in the red, with long-term Treasuries off by almost 3%. To end on a positive note, managed futures funds have been well positioned; all of the funds that we utilize are up for the month, offsetting some of the losses in fixed income.
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| ASSET CLASS | INDEX | INDEX DESCRIPTION |
| U.S. Microcap Equity | Russell Microcap | Measures the performance of the microcap segment of the US equity market. |
| U.S. Small Cap Equity | S&P 600 | Measures the small-cap segment of the U.S. equity market. |
| U.S. Large Cap Equity | S&P 500 | Represents US large company stocks. |
| Long-Term Treasuries | Morningstar US 10+ Yr Treasury Bond | Measures the performance of fixed-rate, investment-grade USD-denominated Treasury bonds with maturities greater than ten years. |
| U.S. REITS | FTSE NAREIT Equity REIT | A free-float adjusted, market capitalization-weighted index of U.S. equity REITs. |
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