MARKET VIEW WEEKLY

ECONOMIC REVIEW

• Though a plethora of economic data was released last week, the main story continued to be the collapse of Silicon Valley Bank (SVB). However, we want to stress that this is different from 2008. SVB differed from a typical bank in that it had a concentrated customer base, with deposits from startup tech and healthcare companies that receive funding from venturecapital firms. Driven by a boom in funding during an era of near-zero interest rates, SVB’s deposits more than tripled between the end of 2019 and the first quarter of 2022, SVB in turn invested most of these deposits in fixed-income securities. As interest rates rose and venture-capital funding dried up, deposits declined sharply, forcing SVB to sell its fixedincome investments at a loss to raise cash.

• The release of the Consumer Price Index (CPI) and Producer Price Index (PPI) were meant to be last week’s highlight, but it was overshadowed by the banking sector.1 CPI month-over-month 0.4% PPI month-over-month -0.1% CPI year-over-year 6.0% PPI year-over-year 4.6% Core CPI month-over-month 0.5% Core PPI month-over-month 0.0% Core CPI year-over-year 5.5% Core PPI year-over-year 4.4%

How do the banking collapse and Inflation data impact you?

• The first piece of good news is that most banks currently have enough capital to absorb these losses, in large part because of efforts taken by the Fed after the 2008 financial crisis to ensure financial firms can weather any storm.

• The second piece of good news is that inflation readings continue to fall. In the 12 months through February, the core CPI gained 5.5%. Representing the smallest rise since December 2021 and followed a 5.6% advance in January.

• Similarly, core PPI showed its lowest print since March of 2021. Because the producer-centric index captures price shifts upstream of the consumer, it’s sometimes looked to as a potential leading indicator of how prices may eventually land at the store level. This means consumers could start to see some relief at the retail level due to lower production costs.

Melissa MinterMarch 22, 2023news, General news, timely topics, Investing

Overview

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The year began with the government stymied by a shutdown, and ended with articles of impeachment levied against the president. In between, both domestic and global economies showed signs of slowing, all while the trade war between the United States and China loomed throughout the year. Nevertheless, investors remained relatively bullish toward stocks, pushing several major indexes to record highs.

While domestic economic growth may have slowed in 2019 compared to 2018, it showed resilience and stamina. The third-quarter gross domestic product expanded at an annualized rate of 2.1% — moderately down from 2018's 3.0% rate, yet still strong enough to outpace global economic growth by a considerable margin. Consumer spending — which accounts for about two-thirds of the U.S. economy — surged, buoyed by a strong labor market, near-record unemployment, solid wage growth, and a burgeoning stock market. All told, the domestic economic expansion continued into its 11th straight year, the longest run in U.S. history.

Last year saw trade disputes between the United States and several of its trade partners reach an accord, but the trade war with China roared. The world's two largest economies engaged in a tit-for-tat skirmish, with each country volleying tariffs on their respective imports at the expense of the exporting nation. Coincidentally, a limited deal was announced just before the holiday shopping season, with the U.S. agreeing to forgo new tariffs and China assenting to allow more U.S. agricultural imports. Further negotiations are presumed, but the relationship between the economic giants remains tenuous at best.

Not only did the ongoing trade war affect global economies, but it also impacted domestic business investment, industrial production, and exports. Part of the justification cited by the Federal Reserve for lowering interest rates three times last year was weakness in business fixed investment and exports. As of November, new orders for durable goods were down 1.3% from the same period in 2018, and business (nonresidential) investment fell 2.3% in the third quarter.

The new year begins with a strong stock market and solid economic growth. The Secure Act, passed in late December, should change the retirement planning (and saving) landscape to some extent. However, the Treasury budget deficit for fiscal 2019 (October 2018-September 2019) exceeded $980 billion — 26% higher than the 2018 fiscal-year deficit. The trade war with China may cool with more mutual concessions, or accelerate, which would continue to dampen global economic growth. The new year will begin with the impeachment process and end with November's presidential election. What happens in between is anyone's guess. Will unemployment and inflation remain low? Will stocks continue to experience growth? Will oil and gas prices moderate or surge? Will the domestic economy continue to accelerate, or suffer a setback? Can the world economy recover, or will it continue to stagnate? If nothing else, 2020 looks to be an interesting year.

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MARKET VIEW WEEKLY

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