Weekly Market Update for February 24, 2023

by Jim Ulland

This week the market mover was an obscure index called the Personal Consumption Expenditure Price Index (PCE). The PCE is a little different from the Consumer Price Index (CPI). The Fed likes the PCE better than the CPI as an indicator of price movements, and that is the only thing the market is thinking about. Higher prices mean more inflation, which implies that the Fed will raise interest rates higher than currently expected.

Friday, the PCE was released, and the DOW dropped 500 points. The recovery in stocks and fixed income has been based on the belief that inflation is trending down. The PCE fractured that narrative, at least temporarily. The next Fed meeting is on March 20th and a 0.25% rate increase is expected.

The 10-Yr Treasury went up 12 bps to 3.94% this week and the 6-month and 12-month Treasuries are paying over 5%. We have been adding Treasuries to portfolios that have cash. This is not a bad place to wait out the storm. For those who can withstand a little more volatility, our Intelligent Fixed Income strategy is locking in yields of 6.5-7%. When the Fed stops raising rates, these securities could surge higher, as they did in January.

Although higher rates give investors the opportunity to lock in attractive fixed income yields, they really are trouble for housing. Existing home sales fell to a 12-year low. More negative economic impacts are expected from higher rates. The February Jobs Report is set to be released on March 10th. This will be another indicator of the impact of high rates. So far, it looks like high rates are causing layoffs of well-paying jobs in sectors like technology, while not affecting areas starved for employees like bars, restaurants, and lodging. The extent of the pending damage from higher rates is unknown. This makes the market’s nervousness.

This week, the S&P 500 was down -2.67% and the NASDAQ -3.33%. Monday the market was closed. Tuesday the S&P 500 was -2.00%, Wednesday -0.16%, Thursday +0.53%, and Friday -1.07%.

Next week, the news will continue its fixation on inflation with plenty of data being released. China’s peace call for the Russian/Ukrainian war will also be in the headlines.

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