Harvest’s Weekly Blog: Interest Rates Start to Thaw, Bond Yields Rise

After strong performance for both bonds and stocks in the month of January, February saw a reversal of fortunes as the January jobs report came in much stronger than expected.  The U.S. economy added 517,000 jobs in January, more than double economists’ expectations. This was the start of a parade of hotter than expected economic data causing the markets to factor in more Fed rate hikes.  Inflation, retail sales, housing and the Producer Price Index were all stronger than expected in January leading markets to adjust terminal Fed Funds rate expectations upwards from around 4.9% on 2/2/23 to 5.4% on 2/24/23 (see chart). 

As the bond market digested the strong numbers, bond yields began to rise, causing lower bond prices in February.  We continue to evaluate the rise in yields and see this as an opportunity to increase our bond exposure and reduce our allocation in Alternative investments.

The stock market rally ended at the beginning of February after seeing the S&P 500 rise to nearly 4200 (over 17%) from the bear market low of 3573 on October 12th, 2022.  It fell back to just under 4000 at the end of February; a -5% pullback.  Pullbacks are normal in a recovery and 5% pullbacks happen (on average) 3 times per year.  

We think it is likely that the January numbers were especially strong due to unseasonably warm weather.  This leads us to believe that seasonality adjustments made by the U.S. Bureau of Labor Statistics are overstated and we could see lower numbers for February and/or March.  What we do know is that the headline CPI (Consumer Price Index – a measure of Inflation) for February and March of 2023 will almost certainly be lower than the 0.7% gain from February 2022 and the 1.0% gain from March 2022.  Currently, projections for CPI (according to the Cleveland Fed) indicate a year over year reading for March 2023 of 5.4%, which would indicate slowing inflation.  This could provide some positive momentum for stocks in the near term.  As always,we will continue to evaluate the economy and the market and make appropriate reallocations to add value to your portfolio.

Have a blessed Lenten Season! 

Jeffrey C. Grenchik, CFP®

Neal A. Schering, CFA®, CFP®, ChFC®

Chad J. Mast, CFP®

Bryan G. Laverman, CFP®

Nicholas A. Perazzolo, CFP®, CKA®

Timothy J. McKenna, Jr., MBA, CFP®

Timothy J. McKenna Sr.

*The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Investing includes risks, including fluctuating prices and loss of principal. No strategy assures success or protects against loss.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Alternative investments may not be suitable for all investors and should be considered as an investment for the risk capital portion of the investor’s portfolio. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.