May 2023 -An End To The Rate Hikes

First, we would like to wish you and your family a Happy Cinco De Mayo! Hopefully, you’re enjoying this Friday afternoon with a margarita in your hand or plan on enjoying one over the upcoming weekend at some point.

It’s hard to believe we are already halfway through the second quarter of the year, so let’s take a look at where the market Indices stand year to date. As of the close of last night (May 4th), the Dow 30, the S&P 500 and the NASDAQ Indices have returned a positive 1.07%, 7.24% and 16.28% respectively -hardly the returns one would expect with a short-term banking crisis on our hands, along with a federal debt ceiling debate standoff and a Federal Reserve that appears to be tone deaf with another .25% interest rate increase on Wednesday.

It’s easy to be bearish given these unresolved issues, but as I mentioned earlier this year in our January 2023 note, “we reviewed all calendar years following negative S&P 500 Index performance and found that the S&P 500 Index had back-to-back negative years in only four instances since 1930. Those occasions occurred during the Great Depression, World War II, the 1970s, and the bubble years —periods perhaps more economically challenging than what we face today”.

Let’s tackle each of these issues mentioned above, with the first being the banking crisis. As you know, a bank is only as strong as the confidence a depositor has within the institution. Since a bank lends out the majority of deposits, a run on any bank would cause its collapse. Since FDIC insurance is currently capped at $250k per depositor (which is why proper titling of your banking accounts is crucial), we do expect new bank legislation to be coming down the pipeline this year.

This could be in the form of another FDIC insurance increase as the last insurance increase from $100k to $250k was in 2008 after the financial crisis and increases tend to happen every 10 -15 years on average (so were due). In addition to some form of FDIC insurance for corporate/business and payroll deposits. Otherwise, there is little incentive for companies to keep uninsured deposits in any other bank besides those deemed too big to fail. JP Morgan’s purchase of First Republic Bank’s deposits and loans this week could squash further panic in the sector for the time being though.

We believe the federal debt ceiling will ultimately be raised as usual -but not without a contentious debate that will be pushed towards the end of this month. Yes, we will see heightened market volatility as we approach the deadline, but to make any substantial adjustments in portfolios to try and game the outcome is generally a fool’s errand.  This morning, The Capital Group published a brief and very thoughtful article regarding this that we would like to share with you. Please click the link here to review the article

Lastly, we believe the Federal Reserve’s interest rate hike on Wednesday of .25% is probably their last hike for the foreseeable future. The latest rate increase brings the federal funds rate to a range of 5% to 5.25%. Fed Chair Jerome Powell suggested the current level of rates may be sufficiently restrictive to bring down inflation. He highlighted that the central bank made a “meaningful change” to its policy statement, removing language that signaled more rate increases would be appropriate. With rates climbing over 500bps (5.0%) within 14 months the effects are now starting to bite.

Remember, monetary policy operates with a significant lag and after a year we are now seeing the economy slow and inflation has declined from 9.06% in June of 2022 to 4.98% in March of 2023. The rate hikes are working, inflation is trending down and there is no need (in our opinion) for further hikes.

Tactically, in regard to portfolio management, we remain fully invested in our equity positions and continue to purchase individual high quality fixed income bonds, CD’s and Treasuries locking in yield to maturities of roughly 5%. We are extending our maturity dates as bonds come due as we expect rates to decline once again in 2024.

We wish you and your family a great Friday evening, and a wonderful weekend!

As always, please reach out to us with any questions or comments you may have regarding your specific situation.


Jaran C. Day, Chief Investment Officer

Griffin Dalrymple, CFP®, Chief Strategy Officer