The trading concluded for April with the S&P500 index finishing up +1.46% for the month, in line with historical norms. And although markets did not gain as strongly as anticipated, it was able to stand strong as corporate earnings fared better than expected as did the gains, +9% for 2023. Now, as we turn the page to May, we await the Federal Reserve’s announcement about interest rates and future rate hikes, which could come out tomorrow afternoon.
The Federal Reserve’s Federal Open Markets Committee (FOMC) meets this week to determine once again the status on the fight against inflation and secondly, the future course of interest rate policy. Right now, the consensus on Wall Street is that the FOMC will once again raise rates by 25 basis points (0.25%) but it is the post-meeting commentary afterward that will drive the market activity for the day. Optimists are hoping to hear Chair Powell acknowledges declining inflation numbers and a slowing economy have arrived and as a result, you could make the case that interest rates hikes can stop (or pause) for a little while you diagnose the continued disinflation. It’s safe to say markets would celebrate this announcement as a positive catalyst and could clear the way for more gains into June. On the other side, if the Chairman continues to see interest rate hikes are a priority, pessimism could return and so could downside volatility.
Beyond the Fed Meeting, the other issue that has caught my attention recently is the debt ceiling. Traditionally the debt ceiling is a formality as Congress has already agreed to a spending budget earlier in the year and now, Congress must raise the debt ceiling to fund these previous obligations since Government spending is MORE than the tax revenue collected. If the debt ceiling wasn’t raised, we would face a potentially catastrophic situation with pension funds, public employees, Sovereign Credit Rating, social security payments, national parks, the military, etc. So, while every member of Congress knows this and wants to prevent a government default, the two political parties often use this crisis as an opportunity to pass their own agendas.
The good news is the House Republicans narrowly passed their debt ceiling and spending reduction proposal last week. But experts think that the bill will not make it through the Senate without changes. The Republicans are looking for cuts in spending, although not in the areas of Social Security, Medicare, or defense spending. On the other hand, The White House has stuck to its position that the full faith and credit of the US Government is not negotiable (not matter how big the deposit) and wants a clean debt increase bill. Long story short, there is a lot left to be written about the debt ceiling so Senator McCarthy and the President will need to find some common ground to prevent a major headwind appearing in June.
Finally, the last catalyst that I am watching is Regional Bank failures. After April, it seems that regional bank failures are no longer considered a systemic threat as risk assets marched forward last month, even as First Republic Bank became the third bank to fail and enter FDIC receivership. While there were moments of fear, they were quickly followed by the onset of optimism; this is how the investing world works today in a 24-hour news cycle. For now, it appears liquidity fears have subsided.