Financial News and Portfolio Management Discussion through February 25th

Concerns over a firmer monetary policy were heightened by fresh economic data, touching off a climb in bond yields and a slide in stock prices last week. The Dow Jones Industrial Average skidded 2.99%, while the Standard & Poor’s 500 dipped 2.67%. The Nasdaq Composite index sagged 3.33% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, retreated 1.23%.^1,2,3

Stocks struggled last week, buffeted by growing fears of further Fed tightening and disappointing forecasts from two major retailers that called into question the consumer’s health. The release of the minutes from the Federal Open Market Committee’s (FOMC) last meeting did little to assuage investor worries. Reflecting these concerns of a more aggressive Fed was that by Thursday, traders were pricing in a 27% chance that the Fed might lift rates by a half-percentage point at its next meeting, far above the 1.3% chance just one month ago.⁴

Stocks took another leg lower on Friday following the release of January’s Personal Consumption Expenditures (PCE) price index, which showed hotter-than-expected price increases and more robust consumer spending.

Minutes from the last FOMC meeting indicated that nearly all members agreed with February’s quarter-point rate increase, though some would have supported a 50 basis point rate hike to move quicker towards the Fed’s target range. While the minutes suggested another 25 basis point hike is likely at their next meeting, investors remain anxious that more recent economic data may prompt a 0.50% hike instead.⁵

The minutes stressed that inflation was still too high. However, members diverged on the economy, with some members finding the risk of recession elevated. In contrast, others feel the Fed may engineer a soft landing or avoid a recession altogether.⁶

^{1. The Wall Street Journal, February 24, 2023, 2. The Wall Street Journal, February 24, 2023, 3. The Wall Street Journal, February 24, 2023, 4. The Wall Street Journal, February 22, 2023, 5. The Wall Street Journal, February 23, 2023, 6. CNBC, February 22, 2023}