2023 April Market Review

The Impact of Higher Rates Are Taking Hold
Bradford Long, CFA, Partner, Deputy Chief Investment Officer

April 2023

Key Observations

• Muted returns of broad market indexes for the month of April hide the churn underneath as the lagged and variable impact from higher rates take hold.
• Leading Economic Indicators (LEI) show more ardent anticipation of economic contraction. History would suggest four months or more of declining indicators is a warning of a recession. As of March 2023, the LEI index has fallen for 12 consecutive months.
• Volatility in the banking sector may reduce access to capital which may hinder economic growth.
• Our outlook for 2023 surmised the transition away from zero-bound interest rates was likely to be a bumpy one, and our views for 2023 remain unchanged with allocations designed to help weather the potential for volatility.

Lagged indicators, such as Gross Domestic Product (GDP) or employment help measure the past but have little predictive value for the future. Leading Economic Indicators (LEI) by contrast seek to proceed economic change by looking further up the value chain. For example, a potential leading indicator of future home inventory is building permits. Unlike the strength of lagged indicators today, leading indicators have been falling.

Historically, four months of falling leading indicators are enough to raise the eyebrows of economists for a potential economic slowdown. In fact, since 1993 the longest consecutive fall for the LEI index without a recession occurring was three months1.

Leading up to the Global Financial Crisis, the LEI index fell 10 of the 12 months prior to the start of the recession in December 2007, eight months consecutively1. Prior to the recession in February 2001, the LEI index fell eight of the preceding 12 months, five months consecutively1. As of March 2023, the LEI index has fallen 12 of the last 12 months1. Where there is no economic law stating that a falling LEI index produces a recession, we believe it would be unwise to interpret the recent equity markets rally as an all-clear signal. Adding to this complexity is the recent volatility we have seen in the banking sector.

An important part of the economic engine is lending. People and businesses often borrow money so they can purchase items. For example, individuals often do not pay all cash for a house or a car, they finance it. Businesses often do not pay all cash for inventory or equipment, they finance it. Rising interest rates have made loans more expensive, however, the additional added effect of stress in the banking sector has also made loans less available.

The effect of tighter standards in banking is less lending, which is a potential headwind for economic growth. The recent news of First Republic being sold to JPMorgan underscores the potential for continued tightening of lending standards putting additional pressure on the economy.

Our 2023 outlook surmised the transition away from a zero-bound interest rate economy and market was likely to be a bumpy one. To that end our continued volatility theme helped underpin our thoughts around risk management and building resilient portfolios meant to weather a variety of economic scenarios. So, while the risk of economic contraction as we outlined above may be rising, this is not an unanticipated event. Additionally, our theme of moderating inflation appears on track with recent data showing signs of material improvement. These views reinforce our opinion that the Federal Reserve is nearing the end of its rate-hiking cycle and our proactive updates at the beginning of 2023 put us in a strong position for the markets ahead.

For more information, please contact any of the professionals at IntentGen Financial Partners.

Disclosure:

The material presented includes information and opinions provided by a party not related to Thrivent Advisor Network. It has been obtained from sources deemed reliable; but no independent verification has been made, nor is its accuracy or completeness guaranteed. The opinions expressed may not necessarily represent those of Thrivent Advisor Network or its affiliates. They are provided solely for information purposes and are not to be construed as solicitations or offers to buy or sell any products, securities, or services. They also do not include all fees or expenses that may be incurred by investing in specific products. Past performance is no guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested. You cannot invest directly in an index. The opinions expressed are subject to change as subsequent conditions vary. Thrivent Advisor Network and its affiliates accept no liability for loss or damage of any kind arising from the use of this information.

Investment advisory services offered through Thrivent Advisor Network, LLC., a registered investment adviser and a subsidiary of Thrivent. Clients will separately engage a broker-dealer or custodian to safeguard their investment advisory assets. Review the Thrivent Advisor Network ADV Disclosure Brochure and Wrap-Fee Program Brochure for a full description of services, fees, and expenses. Thrivent Advisor Network LLC advisors may also be registered representatives of a broker-dealer to offer securities products. 

Any specific securities identified and described do not represent all of the securities purchased, sold, or recommended for advisory clients. The reader should not assume that investments in the securities identified and discussed were or will be profitable. A summary description of the principal risks of investing in a particular model is available upon request. There can be no assurance that a model will achieve its investment objectives. Investment strategies employed by the advisor in selecting investments for the model portfolio may not result in an increase in the value of your investment or in overall performance equal to other investments. The model portfolio’s investment objectives may be changed at any time without prior notice. Portfolio allocations are based on a model portfolio, which may not be suitable for all investors. Clients should also consider the transactions costs and/or tax consequences that might result from rebalancing a model portfolio. Frequent rebalancing may incur additional costs and/or tax consequences versus less rebalancing. Please notify us if there have been any changes to your financial situation or your investment objectives, or if you would like to place or modify any reasonable restrictions on the management of your account.

Advisory Persons of Thrivent provide advisory services under a “doing business as” name or may have their own legal business entities. However, advisory services are engaged exclusively through Thrivent Advisor Network, LLC, a registered investment adviser. IntentGen Financial Partners and Thrivent Advisor Network, LLC are not affiliated companies. Information in this message is for the intended recipient[s] only. Please visit our website  www.intentgen.com  for important disclosures.
This communication may include forward looking statements. Specific forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and include, without limitation, words such as “may,” “will,” “expects,” “believes,” “anticipates,” “plans,” “estimates,” “projects,” “targets,” “forecasts,” “seeks,” “could’” or the negative of such terms or other variations on such terms or comparable terminology. These statements are not guarantees of future performance and involve risks, uncertainties, assumptions and other factors that are difficult to predict and that could cause actual results to differ materially.

Index Benchmarks presented within this report may not reflect factors relevant for your portfolio or your unique risks, goals or investment objectives. Past performance of an index is not an indication or guarantee of future results. It is not possible to invest directly in an index.

The Leading Economic Index (LEI) is an index published monthly by The Conference Board. It is used to predict the direction of global economic movements in future months. The index is composed of 10 economic components whose changes tend to precede changes in the overall economy.

The Economic Cycle Research Institute (ECRI) based in New York City, is an independent institute formed in 1996 by Geoffrey H. Moore, Anirvan Banerji, and Lakshman Achuthan. It provides economic modeling, financial databases, economic forecasting, and market cycles services to investment managers, business executives, and government policymakers.

1Conference Board Leading Economic Index as of March 31, 2023

The Bloomberg Commodity® Index (BCOM) is a broadly diversified commodity price index distributed by Bloomberg Index Services Limited. The Bloomberg U.S. Aggregate Bond® Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the U.S. bond market. The Bloomberg U.S. Corporate High Yield Bond® Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. FTSE Nareit (Financial Times Stock Exchange - National Association of REITs) Equity REITs Index contains all Equity REITs not designed as Timber REITs or Infrastructure REITs. It is a free-float adjusted, market capitalization-weighted index of U.S. equity REITs. Constituents of the index include all tax-qualified REITs with more than 50 percent of total assets in qualifying real estate assets other than mortgages secured by real property. The MSCI EAFE® (Morgan Stanley Capital International Europe, Australasia, and the Far East) Index is a broad market index of stocks located within countries in Europe, Australasia, and the Middle East. The MSCI (Morgan Stanley Capital International) Emerging Markets® Index is a selection of stocks that is designed to track the financial performance of key companies in fast-growing nations. The Russell 2000® Index measures the performance of the 2,000 smaller companies that are included in the Russell 3000® Index, which itself is made up of nearly all U.S. stocks. The Russell 2000® is widely regarded as a bellwether of the U.S. economy because of its focus on smaller companies that focus on the U.S. market. The S&P 500® Index, or the Standard & Poor's 500® Index, is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies.