Weekly Market Update: May 30, 2023
The U.S. economy is likely headed into recession. Indeed, the Conference Board’s Leading Economic Index (LEI) fell 0.6% in April. This marked the 13th consecutive decline for the LEI, which is an objective set of data that helps to forecast future economic activity. The weakness reflects declines in housing and manufacturing activity, along with the recent deceleration in the pace of retail sales growth.
The economic slowdown may give the Federal Reserve a reason to pause on the interest-rate front. Recent price data indicate that inflationary pressures are abating, and the Fed must guard against overtightening and putting additional pressure on the credit markets. Banks are getting more hesitant to lend, as deposits decline, which is not a good backdrop for business investment.
There remains a disconnect between the Federal Reserve’s sentiment on monetary policy and what Wall Street expects the central bank to do later this year. Most senior Fed officials have reiterated the stance that the federal funds rate needs to stay above the 5.00% level for an extended period to effectively fight inflation, while the market is pricing in cuts totaling around three-quarters of a percentage point. If the Fed holds its ground, that could lead to equities taking a tumble later this year. The higher-growth technology companies that have rallied nicely year to date could lead the way down, for a time.
Then there is the battle on Capitol Hill to raise the debt ceiling. An inability to reach an agreement would force the United States to default on its obligations and put the government’s bond ratings in jeopardy. As we went to press, there were some signs that government officials were making progress toward an accord, but the situation remains fluid. It should be noted that when the two parties struggled to reach a deal in 2011, volatility spiked and the broader equity market fell sharply.
Conclusion: Investors should proceed with caution, as the market is facing a lot of unknowns, including what the Fed is thinking about monetary policy and a slowing economy.
Source: ValueLine.com
