Taking Stock: First Quarter 2023 Executive Summary

The year is off to a positive (albeit turbulent) start, with U.S. stocks closing notably higher over the quarter. In spite of recession fears, continuing geopolitical risks, a mini banking crisis and cryptocurrency meltdowns, the markets showed remarkable resilience.

While it may not seem like it, with the doom and gloom in the headlines on the daily, the economy is surprisingly strong -- especially considering sustained headwinds (coming off a global pandemic and related supply chain issues, the continuing war in Ukraine, a deepening global energy crisis and unprecedented interest rate hikes . . .  just to name a few).  And arguably, there is cause for optimism.  GDP estimates for Q1 are coming in right at the sweet spot at 2.5% (most economists consider growth between 2% and 3% ideal).   Inflation is trending downward after hitting 40-year highs during 2022 (a good indication that the Fed’s aggressive rate hikes may be nearing an end).  And despite fears of tighter monetary policy slowing the economy, unemployment remains historically low.  

Still, there is much ambiguity about the future and an unusual amount of disagreement among industry experts.  Contradictory and divergent information as to where the economy and the markets are headed abounds.  A lot depends on the unknowns – including inflation, interest rates, and what will be done about the national debt ceiling.  There’s no crystal ball to show whether the country is heading for a recession or a soft landing, but from today’s vantage point, should a recession hit, we would expect it to be mild. 

Undoubtedly uncertainty persists, but our unwavering confidence in staying the course remains constant.  We are committed to focusing on your long-term goals and objectives, concentrating on quality securities with strong balance sheets and patiently riding out this cycle together.  

"You don't have a recession when you have 500,000 jobs and the lowest unemployment rate in more than 50 years."   -- Treasury Secretary Janet Yellen 

Recent Economic Data: 

U.S. National Debt Ceiling. In January the U.S. hit the debt ceiling (a cap on national debt without congressional approval).  “Extraordinary measures” will continue to pay the bills for the near term.   After that Congress must agree to raise the debt ceiling or the U.S. will default on its obligations.  It sounds daunting; however, this is nothing new.   Congress has ALWAYS acted when called upon to raise the debt limit, in fact it has been done 78 times in the last 63 years.  While the current partisan polarization may make reaching an agreement more difficult, it’s highly unlikely Congrass will fail to raise the ceiling …the U.S. has never defaulted on its obligations, and the fallout would be disastrous to U.S. and global economies.  

And then there is the issue of the debt itself.  Most economists agree that the $31.4 trillion national debt isn’t a problem … until it is.   The U.S. debt-to-GDP ratio is one of the highest in the world and rapidly increasing, and servicing this debt accounts for 12% of federal spending. Unless steps are taken, one day it will jeopardize essential programs including Social Security and Medicare and put national security at risk.

Gross Domestic Product (GDP).  The GDPNow model estimate for real GDP growth in Q1 2023 is 2.5% (seasonally adjusted annual rate; estimate released April 14, 2023).  Comparatively GDP increased at an annual rate of 2.6% in Q4 2022 (estimate released March 30, 2023).  

Unemployment.  The unemployment rate was 3.5% in March (3.5% December 2022).  Total non-farm payroll employment increased by 236,000 in March, with the number of unemployed persons at 5.8 million.  These measures have shown little net movement over the past year.   

Consumer Confidence.  The Conference Board Consumer Confidence Index, an indication of consumer attitudes and buying intentions, now stands at 104.2 (1985=100), a decrease from 108.3 in December.    

Consumer Price Index (CPI).  The CPI for All Urban Consumers (CPI-U), a measure of inflation which shows “cost of living” fluctuations, increased 0.1% in March on a seasonally adjusted basis, and for 12 months ending March the CPI-U increased 5.0% before seasonal adjustments, the smallest 12-month increase since the period ending May 2021.  

Earnings.  For Q1 2023, the estimated earnings decline for the S&P is -6.8%  … the largest decline reported by the index since Q2 2020, when the impact of the Covid pandemic sent earnings spiraling -31.8%.

Housing.  Privately-owned housing starts in February were at a seasonally adjusted annual rate of 1,450,000, almost 10% above the January estimate, but 18% lower than the February 2022 rate of 1,777,000.  Builders’ Confidence broke a twelve-month losing streak during the quarter with January and February both seeing gains.  As mortgage rates moderated, the index was at 44 in March, up from 31 in December but still below the breakeven level of 50.  The National Association of Home Builders Chief Economist, Robert Dietz, said “Even as the Federal Reserve continues to tighten monetary policy conditions, forecasts indicate that the housing market has passed peak mortgage rates for this cycle."

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Executive Summary Sources:

https://www.reuters.com/markets/us/yellen-you-dont-have-recession-when-us-unemployment-53-year-low-2023-02-06/

https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/

https://home.treasury.gov/policy-issues/financial-markets-financial-institutions-and-fiscal-service/debt-limit#:~:text=Since%201960%2C%20Congress%20has%20acted,29%20times%20under%20Democratic%20presidents.

https://www.worldeconomics.com/Debt/

https://www.nahb.org/news-and-economics/press-releases/2023/03/builder-confidence-edges-higher-in-march-but-future-outlook-uncertain

https://www.nahb.org/news-and-economics/press-releases/2023/02/cautious-optimism-for-builders-in-february

https://www.atlantafed.org/cqer/research/gdpnow

https://www.bea.gov/news/2023/gross-domestic-product-fourth-quarter-and-year-2022-third-estimate-gdp-industry-and

https://www.bls.gov/news.release/pdf/empsit.pdf

https://www.conference-board.org/topics/consumer-confidence

https://www.bls.gov/news.release/cpi.nr0.htm#%20

https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_040623.pdf

https://www.census.gov/construction/nrc/pdf/newresconst.pdf

https://www.morningstar.com/indexes/dji/!dji/performance

https://www.morningstar.com/indexes/xnas/@cco/performance

https://www.morningstar.com/indexes/spi/spx/performance

https://finance.yahoo.com/quote/%5EDJI/history?p=%5EDJI

https://finance.yahoo.com/quote/%5EIXIC/history?p=%5EIXIC

https://finance.yahoo.com/quote/%5EGSPC/history?p=%5EGSPC

The views expressed represent the opinion of Asset Management Financial Solutions, Inc. (“AMFS”) and are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and AMFS’s view as of the time of these statements.  Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties.