Hope all is well with you. Financial markets have been event-filled as of late (especially in the banking sector), so I wanted to keep you up-to-date by sharing last week’s developments and offering a look at this week.
U.S. stock indexes rose last week in choppy trade, even as the Federal Reserve hiked interest rates by another 0.25%. Though the Fed did raise rates once again, there could be visible glimmers of light at the end of the Fed rate hike tunnel.
Tallying last week, the S&P 500 was higher by 1.39%, the Nasdaq 100 increased by 1.97%, and the Dow Jones Industrial Average climbed by 1.18%.
Fed Rate Hike
In alignment with most expectations, the Fed raised the U.S. benchmark lending rate by 0.25% last week, bringing its target interest rate range to 4.75% - 5.00%.
The Fed’s goal of 2% inflation is still quite a distance away, with consumer inflation running at 6% at the last data release.
The Fed did indicate that interest rate increases are nearing an end, but warned that “the Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.
"The process of getting inflation back down to 2% has a long way to go and is likely to be bumpy,” Jerome Powell said.
The hike marked the Fed's ninth consecutive interest rate hike.
Bond Yields Fall
Wait a minute! The Fed raises rates, and bond yields fall? Yes! Though such a response isn’t typical, that is exactly what happened last week.
Bond yields of several varieties fell, with the 2-year note yield settling at 3.775%, down from the previous week's close of 3.848%.
The U.S. 10-year note yield also finished slightly lower on the week, settling at 3.379% last week versus the previous week's close of 3.396%. The 2/10 yield curve remains inverted.
However, at the time of writing, the inversion is less steep than it was in recent weeks, which could be encouraging news. The 10-year and 2-year note yields both fell to their lowest levels since September last week.
Home Prices Dip
It sounds too good to be true if you are a prospective homebuyer. But, according to data from the National Association of Realtors, home prices declined 0.2% in February from a year earlier.
The decline marks the first year-over-year decline since February 2012 and brings the median price for an existing home to $363,000. That is 12.3% lower than the record of $413,800 set in June of 2022.
The slight price dip seemed to motivate prospective buyers to jump off the sidelines, as evidenced by existing home sales surging by 14.5% in February.
Perhaps we see signs of a shifting market in real estate. However, buyers seeking mortgages will need solid credit amid what seems to be a tightening lending market.
Price Check This Week
This Friday gives us the latest reading on the Fed’s preferred inflation gauge, the Core Personal Consumption Expenditures Price Index. At last check, it rose 0.6% in January, which was higher than expected.
Forecasts currently show expectations of a 0.4% rise month-over-month for February data, according to Bloomberg. Core PCE data excludes volatile food and energy.
The Core PCE data will be watched and analyzed by most market participants. Any signs of inflation easing could especially encourage market bulls, given expectations that the Fed could be nearing completion of its rate-hiking mission.
On the other hand, if inflation data remains elevated, the Fed may have more work to do, and the market may have to adapt to changing expectations, which could result in a resumption of market volatility.
Presently, broad market sentiment seems to be at a bit of a crossroads. Is the market getting ahead of itself by thinking the Fed is close to done raising rates? Could there be more volatility ahead, courtesy of the recent banking turmoil? Or have the recent issues with banks helped the Fed in achieving its mission?
As long-term investors, we do not become overly concerned with the week-to-week or day-to-day developments. Let’s leave that for the short-term traders and algorithms. The ability to hold assets through market cycles is one of the beautiful aspects of long-term investing.
With that said, if you have any questions or if I can be of service to you, please feel free to respond to this email or give me a call. I’m always here as a resource.