Equities marched higher last week as volatility eased and banking concerns declined. With the banking fears and economic fears, earnings analysts have revised Q1 earnings lower than average.
However, recent data shows that flows into money markets (perceived safe haven) have slowed since the banking crisis began. In addition, short-term lending and “bridge loans” accessed by commercial banks from the Fed have also declined. The market is still torn as to whether or not the Fed raises rates one more time in May. Probabilities have hovered around 50:50 between no rate hike and 25 basis points in May. The key remains the consumer and how spending proceeds at current interest rate and inflation levels.
Good news on the inflation front as the PCE Index declined for the 6th time over the past 8 months.
The University of Michigan’s Consumer Inflation Expectations continued to drop for the 8th time out of the last 9 months. The Atlanta Fed’s expectation of first quarter GDP is +3.2%. If the consumer holds on and the Fed does pause in May, we could expect the banking crisis to be behind us. Historically speaking, April has been a solid month for S&P 500 Index returns. Assuming the Fed doesn’t surprise the market with hawkish speeches and Secretary Yellen can keep from unnecessarily adding to market fears, we could see a less bumpy road ahead.
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