Weekly Market Update: March 27, 2023

Inflationary pressures seem to be gradually waning. The Consumer Price Index (CPI) showed prices rose 6.0% during the month of February, year over year, which was an improvement from the January figure. In addition, the monthly Producer Price Index (PPI) provided a favorable reading. In general, disinflation can be seen in several areas, including the critical energy category. Specifically, the price of crude oil has fallen under the $70-a-barrel mark. Energy is heavily utilized by consumers and businesses, so the decline here should be significant for prices overall. In addition, the February employment report showed upward pressure on wages may be easing.

The Federal Reserve is in a difficult position. Despite some progress, inflation remains above the central bank’s 2% target rate, and it is unclear if that goal can be reached without risking a recession or systemic disruptions. For instance, some regional banks have been buckling, as rising interest rates have depressed balance sheets and led to liquidity shortfalls. These developments may influence the Fed, which not too long ago struck a more hawkish tone. While we write this report, the Federal Open Market Committee (FOMC) was set to make an interest-rate decision.

The corporate outlook remains uninspiring. Many companies delivered a weak finish to 2022. Lately, reducing staff and defending margins seems to be more important than business expansion. At present, most analysts are looking for earnings to decline modestly in the first quarter, with a possible rebound later in the year. In this context, the equity market, which currently trades at a price-to-earnings multiple of 17, may look expensive if profits deteriorate.

The stock market remains choppy. The S&P 500 Index advanced in January, but has since surrendered its gains. Currently, the major equity sectors show a bifurcated market. The technology stocks, often viewed as risky, have been leading. In contrast, the financials, traditionally seen as conservative, have fallen out of favor. Moreover, investors have been buying gold (a flight-to-safety move). This disconnect may make for uneven conditions until sentiment improves and participation broadens.

Conclusion: Investors should hold shares of quality businesses that have strong operations and solid financials.

Source: ValueLine.com