Recently, we have talked about a bunch of headline issues that are not real problems. Today, I want to discuss something that could be a real problem: the pending debt ceiling confrontation. This issue is one we need to understand and pay attention to. But as we will see, once again, it is also likely that the outcomes won’t be nearly as bad as the headlines suggest. It is something to watch but not something to panic about. 

My colleague Sam Millette, director, fixed income on Commonwealth’s Investment Management and Research team, helped me put together this month’s Market Risk Update. Thanks for the assist, Sam! Let’s take a closer look.

We are at the start of the period when companies release their results for the first quarter of 2023, known as earnings season. With everything going on—inflation, rate hikes, a labor shortage, the weakness of the dollar, a pending recession, the list goes on and on—the results are unusually uncertain this time around. Analysts are struggling to figure out exactly what all this means. 

Following up on Tuesday’s discussion of why the dollar isn’t collapsing and will not do so, let’s take a look at some of the other panic memes showing up in our news feeds. This will be a range of quick hits, as there are a bunch to cover.

My colleague Sam Millette, director, fixed income on Commonwealth’s Investment Management and Research team, helped me put together this month’s Economic Risk Factor Update. Thanks for the assist, Sam! Let’s take a closer look.

I have been getting a lot of questions around the dollar in recent weeks. De-dollarization seems to be a thing, as do central bank digital currencies, along with the latest round of worries about what the government is going to do to our savings. There is much to talk about, but the root of most of these questions is this: the notion that sometime soon the value of the dollar will collapse, making our savings valueless.

There is a lot riding on the monthly jobs report, which comes out tomorrow. For the economy, more jobs are good: more workers, more wage income, more spending ability, and so forth. There’s no real downside. For financial markets, however, a strong report would be problematic. Those workers—earning and spending their wages—add to demand, which adds to inflation. So, a strong report would be bad news for the Fed, for interest rates, and for markets. This is the problem we face tomorrow.

After a weak February, markets rallied in March. U.S. markets were up by low single digits, while bond markets were in the same range. International markets also showed modest gains, with developed markets about the same as the U.S. and emerging markets doing slightly better. For the quarter as a whole, the Nasdaq did best and moved into a bull market by some measures, followed by developed international markets and the S&P 500. This was a stronger start to 2023 than most had expected, and it may signal how the rest of the year will play out.

U.S. markets were up by low single digits in March. For the quarter, the Nasdaq performed best, followed by international developed markets and the S&P 500. The primary driver was the progress on inflation, which is well below where it started the year. Still, fears of a broader banking crisis rattled markets after the Silicon Valley Bank collapse. Federal action resolved the immediate concern, but weak balance sheets could signal tighter financial conditions ahead.

It has been an eventful first quarter of the year. When we started 2023, expectations were for a recession in fairly short order, for markets to continue to tank, and for the news to remain bad. Instead, we end the quarter in a much better place than we started. Economic growth is significantly positive. Markets are up, with the Nasdaq now in a new bull market. And while there have been significant negative events—the banking crisis comes to mind—the actual effects we are seeing from those events simply are not that bad.