From the Desk of Joe Rollins
Since the beginning of 2022, all the talk you hear in the financial press is about the upcoming recession. Many forecasts predicted we would have a recession in 2022, but alas that did not happen. As we rolled around to 2023, those same people said that we missed the recession in 2022 but clearly it was only a matter of time. As we finished March 2023, there is still no evidence that recession is forthcoming. But that all could change with a media blitz to convince us hard times are coming. As the saying in the media goes, “If it bleeds it leads.”
Due to the normal pressures of tax season, I decided to cut this blog short and only cover the more compelling stories for this early spring season. I must reflect that the first quarter of 2023 was quite excellent. Even though the loud screams of the financial media told us that the world was coming to an end and breadlines would soon be forming on the streets, the S&P 500 Index had an excellent quarter up 7.5% for the quarter.
I wonder how few of those on Wall Street actually projected such a nice increase for the first quarter of 2023. While I can’t get into all the important issues, I want to discuss the current economy and the enormous pressure that the financial media is forcing on America with this call for recession. I also must cover the situation with the banks that went out of business during the month of March.
I want to cover those interesting subjects, but first I must cover what has become quite an excellent quarter. The Standard and Poor’s 500 Index stocks were up 3.7% in the month of March, and up 7.5% year-to-date for 2023. The NASDAQ Composite was up an excellent 6.8% in March and is up 17% for the year 2023. The DOW Jones Industrial Average was up 2.1% in March and is fractionally up 0.9% for the year 2023. All these Indexes performed very well during the first quarter of 2023.
Even the Bloomberg Barclays Aggregate Bond Index was up 2.5% for the month of March and was up 3.1% for the year-to-date. For the first time in over three years, it looks like the bond funds are now starting to become competitive with stock funds. While the Federal Reserve was increasing interest rates was not a good time to be invested in bonds, the time has come to review them and determine whether they should be a part of a portfolio.
Almost every day I watch the financial news and virtually every other sentence uttered by the anchors revolves around the upcoming recession. What is interesting is that they have been discussing this since January 2022. So far, the recession has not occurred. However, there is a high likelihood now that public sentiment will in fact create the recession that the media has been calling for over a year now.
Take, as an example, a corporate executive who would be negligent in his duties if he did not begin to lay off people due to an upcoming recession. You hear famous entrepreneurs such as Jeff Bezos telling the public that they need to be careful and should not purchase a new car, new home or go on expensive vacations. Might it be possible that we talked ourselves into a recession when no recession actually exists?
It does not require much to turn the economy from positive to negative if suddenly consumers quit spending. What if, due to these misplaced fears, people decide not to purchase a new car, home, or go on expensive vacations? We might just in fact turn this strong economy into a weaker one and end up with the result that the media has been forecasting.
Once again, the news on the economy was quite good for the month of March. During the month of March, the U.S. economy added 236,000 new jobs which was pretty much as anticipated. More importantly the unemployment rate dropped during March to 3.5%. This is an extraordinarily low rate and is only one tick above the lowest ever recorded (not in wartime) at 3.4%. Even though the national unemployment is at 3.5%, the unemployment rate in some states is even quite lower at 2%. There is no question that the job market is extraordinarily strong and has not faulted due to the ever-increasing interest rates by the Federal Reserve.
What is more important is that even though the number of job openings has fallen, there are still 1.67 jobs for every unemployed person in the U.S. For the month of March, new job openings measured 9,931,000. The total number of unemployed in America is 5,839,000. As you can see, there are ample jobs for every unemployed person in America that wants to work. Every time I discuss the subject, it always goes back to the point of why there are not enough workers in America to fill the necessary job openings.
There is a general belief that due to the enormous amount of government funding that we had in the Covid years there are a lot of potential workers that are not taking jobs because they still have money left over from the government. One of the ways that we know this to be true is that currently there are $5.6 trillion in money market and savings accounts in the U.S. alone. In recent months, those accounts have now been paying market rates that are attracting new investors to these money market accounts. However, this huge sum of cash is also fuel for the next run-up in the stock market. If interest rates start to fall and these money market rates can no longer compete, much of this money will flow out from the money market accounts into ordinary equities and bonds. This is a lot of fuel for a potential runup in the financial markets.
There was also great news in this more recent employment report. For the first time in years, the participation rate has increased and there were actually people looking for a job during March. If this is the case, more people are coming out and filling the gaps in the job marketplace. That is very much a benefit to the economy, because these people become consumers that were before only living off their savings. Maybe there will be a day soon that the public will all go back in unison, jobs will be filled, and every able American will become a tax-paying consumer that will increase GDP for us all.
So, what is the actual state of the economy today? Even though they have been forecasting recession now for a year and a quarter, the Atlanta Federal Reserve forecasts the GDP will be up 2.2% (as of April 10, 2023) for the first quarter of 2023. While not a great increase in GDP, it is still a very long way from negative. Also, we should be reminded that the first quarter is typically a weak quarter for GDP, mainly due to weather and constraints in the northern states.
So, as we sit here today there are still no overwhelming signs of an upcoming recession. But as mentioned above, maybe this negative attitude of the media will force the country into recession due to consumers pulling back on products or services they normally would have purchased.
I have always been a firm believer that sentiment in the U.S. is extremely important for keeping GDP higher. If an employee is worried about their job, they are not likely to purchase a new car, a new house or go on an expensive vacation. It might just be that consumers will shut down the economy due to the fear of the unknown recession in the future.
The other answer may be that it is just political. The financial media, which clearly supports the current administration, will continue to talk down the economy until we get closer to the election cycle. At that time, they may pivot and comment about how great the economy is doing, and that greatness will be directly attributed to the current administration even though the economy was even stronger in 2019 before Covid. We went through a huge contraction in the economy due to Covid, and now we are getting back to where we were. This has been an enormous transformation in the economy, but it continues to be strong and, likely, will get stronger and not weaker as the months progress.
There is no question that the Federal Reserve has put tremendous pressure on interest rates. What is somewhat amusing is that with these increases in interest rates, the first bank to fall was one of their own. During March, we had the failure of Silicon Valley Bank in California and Signature Bank in New York. There were runs on these banks to remove cash just like it happened in “It’s a Wonderful Life.” If you are familiar with the classic Christmas movie, the people withdrew more money from the bank than its liquidity, and then the bank failed. Basically, that is what happened to these two banks.
Think about it in this fashion: a banker loans money to a local business on a 6-year loan at 6%. At that time when the bank made that loan, they were paying virtually nothing for customer deposits at their bank. So basically, the bank could take the customer deposits that they were getting for basically free and loan that money to the local business owner at 6% and make a nice profit.
Beginning in March of 2022, the Federal Reserve started a massive and too rapid increase in interest rates over a relatively short period of time. Suddenly, banks were required to offer higher interest rates on their deposits, in order to satisfy the public. However, the banks were constrained by the fact that they already had long-term money out at rates that would not allow them to pay higher interest rates on their deposits. At that time, the public saw what was happening, and made a major movement to remove their money from the banks.
The evolution of technology has created the most powerful force in money today. With your iPhone you can move literally billions of dollars in minutes from one bank to another. You can be at the beach or somewhere other than home, but if you have access to an internet connection you can move money from one bank to another that is paying a higher rate of return. This is exactly what happened to Silicon Valley Bank. When interest rates began paying up to 4%, the bank was unable to meet the demand for money, leaving the bank to go to these higher rates.
It was quoted by the Federal Reserve that in one day, that bank lost over $100 billion in assets with money being transferred to larger and more stable banks. On Wednesday of that week, Silicon Valley Bank was forced to sell their bond portfolio of $20 billion to satisfy customer withdrawals. Due to the extremely fast increase in interest rates by the Federal Reserve, this bond portfolio had deteriorated in value and the bank suffered a loss after tax of $1.8 billion. When that news broke on Thursday, customers lined up to withdraw their cash from the bank thinking it would surely fail at this point. If the Federal Reserve had not closed the bank on Friday, it was forecasted that the entire liquidity of the bank would have been gone before the close of business on Friday.
The good news is that the failure of these two banks did not create losses to consumers. It is true that the shareholders lost all their money, and the bondholders probably lost theirs as well, but no depositor lost their money due to the insurance held by the banks. However, there was a general run-on banks after this event of people moving money out of smaller banks into larger ones or to money market accounts that paid higher interest rates. Once again, the Federal Reserve stepped in to protect the smaller banks and last week they loaned out over $380 billion to member banks, allowing them to keep their liquidity higher. It appears to me that the Federal Reserve, due to its swift movement, has stopped the outflow of funds from local banks and therefore the crisis that we had in March has probably passed us at this point.
The strength of the labor market for the month of March reported above will probably lead the Federal Reserve to increase interest rates one last time during its meeting in May. It is interesting that the futures in the bond market are actually forecasting that the Federal Reserve will cut interest rates later in 2023. It is very confusing to the public and certainly to me that the Federal Reserve would go ahead with an interest rate increase in May, if only a few months later they would be forced to cut it in the Fall of 2023. That is the proof to me that the Federal Reserve has gone too far and if they are forced to cut rates over such a short period of time, why would they just pass on an increase in interest rates at this time? I guess when they write the book a few years from now we will get a better insight into what the Federal Reserve is thinking.
All we know is that in the financial markets it is going to be a bumpy ride. This year, even though the first quarter was excellent, there is no guarantee that the coming quarters will be just as good. However, what is clear to me is that corporate earnings will never be as negatively impacted as financial media outlets forecast. Many of the companies have downsized their employment base and cut their expenses so profits will stay higher even if economic activity is lower. That is exactly what businesses should do. They should right size their expenses based on their projected revenue. During Covid, so many businesses overstaffed to meet the pandemic requirements. Now those days have passed, and it is time to right size their businesses for future profits.
I continue to believe that this year will be a positive one with profits around 20%. We are off to a great start with profits up 7.5% for the first quarter of 2023. Also, it is clear that the international markets are improving, and those markets are undervalued as compared to their U.S. counterparts. My recommendation is for everyone to remain invested and to increase investments where you can. We are at the time where you can make IRA contributions for 2022 and 2023. Everyone reading this post should contribute to their IRA’s annually without fail.
As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
Since the beginning of 2022, all the talk you hear in the financial press is about the upcoming recession. Many forecasts predicted we would have a recession in 2022, but alas that did not happen. As we rolled around to 2023, those same people said that we missed the recession in 2022 but clearly it was only a matter of time. As we finished March 2023, there is still no evidence that recession is forthcoming. But that all could change with a media blitz to convince us hard times are coming. As the saying in the media goes, “If it bleeds it leads.”
 |
| Penelope Lu Flores commending herself on arriving early and getting her mom, Elizabeth, out of the end of tax season |
I wonder how few of those on Wall Street actually projected such a nice increase for the first quarter of 2023. While I can’t get into all the important issues, I want to discuss the current economy and the enormous pressure that the financial media is forcing on America with this call for recession. I also must cover the situation with the banks that went out of business during the month of March.
 |
| A day at the zoo is a day well spent! (Ava and Josh) |
Even the Bloomberg Barclays Aggregate Bond Index was up 2.5% for the month of March and was up 3.1% for the year-to-date. For the first time in over three years, it looks like the bond funds are now starting to become competitive with stock funds. While the Federal Reserve was increasing interest rates was not a good time to be invested in bonds, the time has come to review them and determine whether they should be a part of a portfolio.
 |
| Lauren Lukowicz out for Easter brunch with her mom |
Take, as an example, a corporate executive who would be negligent in his duties if he did not begin to lay off people due to an upcoming recession. You hear famous entrepreneurs such as Jeff Bezos telling the public that they need to be careful and should not purchase a new car, new home or go on expensive vacations. Might it be possible that we talked ourselves into a recession when no recession actually exists?
It does not require much to turn the economy from positive to negative if suddenly consumers quit spending. What if, due to these misplaced fears, people decide not to purchase a new car, home, or go on expensive vacations? We might just in fact turn this strong economy into a weaker one and end up with the result that the media has been forecasting.
 |
| A “Penny” for your thoughts… |
What is more important is that even though the number of job openings has fallen, there are still 1.67 jobs for every unemployed person in the U.S. For the month of March, new job openings measured 9,931,000. The total number of unemployed in America is 5,839,000. As you can see, there are ample jobs for every unemployed person in America that wants to work. Every time I discuss the subject, it always goes back to the point of why there are not enough workers in America to fill the necessary job openings.
 |
| Carter and Josh showing Ava and Dakota why it’s called the Windy City. |
There was also great news in this more recent employment report. For the first time in years, the participation rate has increased and there were actually people looking for a job during March. If this is the case, more people are coming out and filling the gaps in the job marketplace. That is very much a benefit to the economy, because these people become consumers that were before only living off their savings. Maybe there will be a day soon that the public will all go back in unison, jobs will be filled, and every able American will become a tax-paying consumer that will increase GDP for us all.
 |
| Cecilia taking one for the team – Happy Birthday! |
So, as we sit here today there are still no overwhelming signs of an upcoming recession. But as mentioned above, maybe this negative attitude of the media will force the country into recession due to consumers pulling back on products or services they normally would have purchased.
I have always been a firm believer that sentiment in the U.S. is extremely important for keeping GDP higher. If an employee is worried about their job, they are not likely to purchase a new car, a new house or go on an expensive vacation. It might just be that consumers will shut down the economy due to the fear of the unknown recession in the future.
 |
| Nathan and Cecilia Cmeyla cheesing it up outside of Truist Park! |
There is no question that the Federal Reserve has put tremendous pressure on interest rates. What is somewhat amusing is that with these increases in interest rates, the first bank to fall was one of their own. During March, we had the failure of Silicon Valley Bank in California and Signature Bank in New York. There were runs on these banks to remove cash just like it happened in “It’s a Wonderful Life.” If you are familiar with the classic Christmas movie, the people withdrew more money from the bank than its liquidity, and then the bank failed. Basically, that is what happened to these two banks.
 |
| Lauren and Jeff discovering “anything is possible with sunshine and a little pink!” |
Beginning in March of 2022, the Federal Reserve started a massive and too rapid increase in interest rates over a relatively short period of time. Suddenly, banks were required to offer higher interest rates on their deposits, in order to satisfy the public. However, the banks were constrained by the fact that they already had long-term money out at rates that would not allow them to pay higher interest rates on their deposits. At that time, the public saw what was happening, and made a major movement to remove their money from the banks.
 |
| Henry letting Lauren know he’s had enough fun at the Beltline |
It was quoted by the Federal Reserve that in one day, that bank lost over $100 billion in assets with money being transferred to larger and more stable banks. On Wednesday of that week, Silicon Valley Bank was forced to sell their bond portfolio of $20 billion to satisfy customer withdrawals. Due to the extremely fast increase in interest rates by the Federal Reserve, this bond portfolio had deteriorated in value and the bank suffered a loss after tax of $1.8 billion. When that news broke on Thursday, customers lined up to withdraw their cash from the bank thinking it would surely fail at this point. If the Federal Reserve had not closed the bank on Friday, it was forecasted that the entire liquidity of the bank would have been gone before the close of business on Friday.
 |
| Josh Portschy’s dog “Hank”ering for a Braves win! |
The strength of the labor market for the month of March reported above will probably lead the Federal Reserve to increase interest rates one last time during its meeting in May. It is interesting that the futures in the bond market are actually forecasting that the Federal Reserve will cut interest rates later in 2023. It is very confusing to the public and certainly to me that the Federal Reserve would go ahead with an interest rate increase in May, if only a few months later they would be forced to cut it in the Fall of 2023. That is the proof to me that the Federal Reserve has gone too far and if they are forced to cut rates over such a short period of time, why would they just pass on an increase in interest rates at this time? I guess when they write the book a few years from now we will get a better insight into what the Federal Reserve is thinking.
 |
| Evan and Alexis making the most of a Monday – Go Braves! |
I continue to believe that this year will be a positive one with profits around 20%. We are off to a great start with profits up 7.5% for the first quarter of 2023. Also, it is clear that the international markets are improving, and those markets are undervalued as compared to their U.S. counterparts. My recommendation is for everyone to remain invested and to increase investments where you can. We are at the time where you can make IRA contributions for 2022 and 2023. Everyone reading this post should contribute to their IRA’s annually without fail.
As always, the foregoing includes my opinions, assumptions, and forecasts. It is perfectly possible that I am wrong.
Best Regards,
Joe Rollins
All investments carry a risk of loss, including the possible loss of principal. There is no assurance that any investment will be profitable.
This commentary contains forward-looking statements, which are provided to allow clients and potential clients the opportunity to understand our beliefs and opinions in respect of the future. These statements are not guarantees, and undue reliance should not be placed on them. Forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual results in future periods to differ materially from our expectations. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements.
