After a strong start to the year for the financial markets, April results were a bit more subdued. U.S. and bond markets showed small gains, with developed international markets performing best of all. Still, emerging markets pulled back.
Given the many open questions regarding the economy, perhaps these results aren’t so surprising. But what do they mean for the month ahead? Let’s take a closer look.
Recession on the Horizon?
Inflation remains one of the biggest concerns. Here, there has been some progress, as we saw significant drops in producer inflation last month. Nonetheless, the overall level is too high. Similarly, while March’s banking crisis seems to have calmed (somewhat), lingering questions around banks suggest this situation isn’t quite over yet. Both of these issues have contributed to the uncertainty around what the Fed will do next. And, of course, all of these come into play in whether a recession is pending or not.
Despite all these worries, the markets did, in general, notch small gains last month. These positive results suggest that things may not be as bad as the headlines suggest. And when we look at the data? That is just what we see.
Economic Data Beats Expectations
Job growth, although down from prior months, remains at a healthy level. Consumer confidence rose a bit, while business confidence stayed green. Further, growth for the first quarter came in positive. Overall, the news is not that bad—and much better than expected.
That better-than-expected outcome is also on display in the earnings data, which is coming in well above what analysts were projecting. In short, the data so far continues to be better than the headlines.
Of Course, Risks Remain
While the general outlook remains positive, risks do remain. The biggest of these is the debt ceiling confrontation, which keeps getting closer. The most recent estimates are that the U.S. will run out of money to pay the bills in June or July. As such, May could be a rocky one.
We’ve also just seen the failure of another bank, First Republic, which could rattle markets. Internationally, China remains a wild card. Plus, there are all the risks we don’t yet see. Nothing is guaranteed.
Despite those risks, the fundamentals are still healthy. The economy is slowing, but it is still growing. We appear to have avoided wider banking system disruption, which is a big positive. While the debt ceiling could be a problem, the overwhelming likelihood is that it will be resolved without a crisis.
More Turbulence Ahead?
So, what can we expect to see over the next several months? The debt ceiling confrontation will finally be worked out. Whether (or not) a recession is still in play will be known. Both inflation and rates should keep improving. That being said, we could certainly see more turbulence. But despite the headlines, we are in a relatively good place, setting the stage for improved health over the next several months as we move past the risks.
Read the full article here
