The Week In Review: April 16 – April 22

It almost feels as if it’s the middle of summer for markets. After the major dustup from the Silicon Valley Bank and Signature Bank situations and the government’s subsequent actions, markets seem to have calmed down and are downright mild compared to how they behaved in the first quarter of 2023. Even so, we managed to close out a pretty strong quarter, with the S&P 500 rising 7.5% despite all the drama. The volatility index (VIX) is down into the midteens, and daily moves are muted. Earnings are disappointing but haven’t cratered the markets.

Despite the calmness, two factors seem to be holding the markets back. Let’s start with recessionary fears: It might come as no surprise that most economic forecasters have predicted a recession could start soon. But the question now is, how do you define “soon?” Last year, people were saying to expect a recession in late 2022 or early 2023; now most of the same people say a recession will likely begin in late 2023 or early 2024.

No matter whom you follow or believe, the conventional expectation is for a mild recession six to nine months from now. When data comes out to support that narrative, the market seems to have a decent day; when the data is gloomier, the markets sink. However, we remain in the 4,000-4,200 range on the S&P 500 (the highs for the year so far) without seeing major movements out of the range.

That brings us to the other factor holding markets back. It previously appeared the Federal Reserve would stop raising rates after its last meeting, especially after the banking sector experienced panic. Now it seems a close shave wasn’t enough for the Fed, and analysts are predicting a nearly 90% chance of another 25-basis-points hike at its May meeting. Another rate increase may not put further pressure on the banking sector, but who knows where the next problem will materialize due to higher interest rates.

The sooner the Fed stops, the better. Inflation data appears to be complying and provides a compelling reason for a pause. The same experts who have predicted coming recessions are also predicting the Fed will pause after its next meeting and begin cutting rates by this time next year. Markets are also expecting this scenario, and as long as nothing comes along to upset that view, it appears the market is willing to sit and wait for what develops.