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February 2023 Monthly Review

"You Can Ring My Bell"

By Loyd Johnson, Chief Investment Officer
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Loyd Johnson PhotoA Look Back

The above title comes from a 1979 Disco song performed by Anita Ward. It reached #1 on the Billboard charts, and was Ward’s only major hit. It was written for an eleven-year-old that talked on the phone quite a bit. (That is how kids communicated in the late 70s!) On March 1st, a management team from First Commonwealth Bank rang the closing bell at the New York Stock Exchange, and it made me think about how much has changed in the last four decades…as well as how much some truths still ring true. One of the lines in the song is, “the night is young, and full of possibilities.” We believe that positive take on life is a pretty good metaphor for our markets. There can be little question that we are, and have been, in the midst of a fairly large-scale “reset” in the economy and the financial markets over the last year or so. Interest rates continue to rise. Inflation, although perhaps peaking, is stubbornly hanging around and affecting our everyday lives. It seems that we are in this somewhat perverse environment where good or better-than-expected economic news is actually a potential negative for the stock markets. The logical progression goes something like: better economic news on the jobs, manufacturing, sales, etc. front means the Fed will most likely continue on their rate-increasing path and keep rates higher for longer. Higher short-term rates mean a real alternative for investors who might otherwise buy stocks.

Indeed, we saw this play out in February as many of those economic indicators were stubbornly positive. The S&P 500 retreated 2.44% in the month, while Emerging Market stocks were much worse, down nearly 6.5%. After a strong January, Core Bonds took a step backwards and posted a -2.59% return. Bank Loans, and the ever-more attractive asset class of Cash were the only returns in the black for the month. Boring old Cash is on pace to give investors a 4% return for the year, and with expectations of further Fed Funds increases in store, that number will only float higher.

A Look Ahead

We continue to overweight Cash in client portfolios. We’ve written in the past about an acronym TINA (There Is No Alternative) that was prevalent in the zero or near-zero rate environment that existed in the Pandemic timeframe. Faced with earning nothing on CD’s or bank deposits, investors flocked to stocks for their dividend return and drove prices higher throughout 2020 and 2021. It was no coincidence that stock prices started to fall as the Fed began their rate-hiking campaign in early 2022. The key Fed Funds rate has gone from basically zero to nearly 5% in one year! There clearly are alternatives now. The Fed has made it very clear that they will continue to use this main weapon to further fight inflation until they achieve their ultimate goal of 2-2.5%. We believe this process will not be a smooth one and will be accompanied by conflicting economic indicators along the way. We have already seen the January jobs report show three times the number of jobs added versus expectations. However, the most recent personal consumption expenditure (PCE) release showed inflation ticking up in January with a .6% monthly number and a 5.4% year over year increase, which surprised many. Now the good news…the bell has always been rung…there is long-standing data that supports a healthy stock allocation for investors…and with uncertainty comes opportunity as we navigate this higher rate cycle.