Stocks closed out March with all three major market indexes higher than they were at the end of February, as the turmoil caused by the collapse of Silicon Valley Bank was contained, at least for now. The banking turbulence may well weigh on lending conditions in the months ahead, creating a new headwind for the U.S. economy, but the prospect of further Federal Reserve rate increases appears to have diminished. Friday’s Commerce Department data that showed the Fed’s favored inflation gauge coming in slightly lower than expected in February reinforced those hopes. For the month, the Dow Jones average added 1.9%, the S&P 500 gained 3.5%, and the Nasdaq Composite climbed 6.7%. For the week, the Dow Jones jumped 3.2%, the Nasdaq rose 3.4%, and the S&P popped 3.5%.
But, history shows that when the Fed keeps increasing interest rates, recession is always a risk. And slump tends to come suddenly after a shock deals a blow to confidence much like the recent banking crisis.
Why is Wall Street so bullish when the prospect of a slowdown and recession looms ahead?
Future Wealth’s View
Many don’t realize the fragility of the US economy until they look at past data. In the 1980s, Paul Volker’s fight against inflation caused the collapse of the banking system and put the country into recession. In the 1990s, Greenspan’s fight against inflation driven by high oil prices killed all chances of a soft landing. The internet bubble burst in 2000 on a series of Fed hikes and everyone knows what happened in the financial crisis of 2008. When consumer confidence takes a sudden downturn, unemployment tends to ramp up and even a mild recession will take the unemployment rate to 6% from the current 3.5%. Of course, many are in denial that the recent banking crisis is not a “Lehman Moment” and that everything will be OK soon.
But, can investors really take that kind of risk? Another rout in the market like in 2022 will likely take years to regain lost capital and many investors will run out of time to make up the lost savings. It is all fine and well to be optimistic and say to oneself – “By the end of 2023, a bull market will bring back all my losses”.
We ask ourselves at Future Wealth LLC – “What if a recession hits and we suffer another set back in the markets in 2023?” The answer lies in Capital Preservation. We are more inclined to protect capital for our clients than chase gains, given the current backdrop in the stock market.
Missing gains in the market may hurt but losing capital once again can be really painful.