Robert Krueger

Alexander Randolph Advisory Inc.

8200 Greensboro Drive, Suite 1125

McLean, VA 22102

703.734.1507

www.alexanderrandolph.com

April 2023
Market Update
(all values as of 03.29.2024)

Stock Indices:

Dow Jones 39,807
S&P 500 5,254
Nasdaq 16,379

Bond Sector Yields:

2 Yr Treasury 4.59%
10 Yr Treasury 4.20%
10 Yr Municipal 2.52%
High Yield 7.44%

YTD Market Returns:

Dow Jones 5.62%
S&P 500 10.16%
Nasdaq 9.11%
MSCI-EAFE 5.06%
MSCI-Europe 4.60%
MSCI-Pacific 5.82%
MSCI-Emg Mkt 1.90%
 
US Agg Bond -0.78%
US Corp Bond -0.40%
US Gov’t Bond -0.72%

Commodity Prices:

Gold 2,254
Silver 25.10
Oil (WTI) 83.12

Currencies:

Dollar / Euro 1.08
Dollar / Pound 1.26
Yen / Dollar 151.35
Canadian /Dollar 0.73

Macro Overview

 

The failure of two regional banks unsettled equity and fixed-income markets globally in March. Financial risks were at the forefront of the financial markets as the closure of Silicon Valley Bank and Signature Bank fostered turmoil throughout the banking sector. The recent banking crisis may alter the Fed’s rate increase trajectory, as various analysts believe that the Fed’s rapid rate increases may have triggered the banking mayhem.

Various bank analysts believe that the recent bank failures are more centralized than widespread in the banking sector, different from the crisis in 2008 when numerous institutions were affected. Some economists are forecasting the likelihood of a heightened recessionary environment should additional banks fail and if the Fed continues to hike rates. What occurred in 2008/2009 was systemic, which means that there was a broad effect across many institutions with the same exposure, such as Mortgage Backed Securities (MBS). This so far has not been the case and is contained to just a handful of regional banks catering to a select group of depositors and customers.

The events in March precipitated a migration to bonds, creating a drop in interest rates which is advantageous to offset inflationary pressures. The concern is that falling rates may also be indicative of a slowing economic environment, with a possible recession should economic activity significantly curtail. The Fed may or may not continue to “fight” inflation by raising rates, depending on economic data and how the bank crisis unfolds. There is a growing consensus that the Fed may be ready to halt raising rates because new data is showing that inflation is definitely cooling off.

The Fed’s latest survey on the economy, the Beige Book, reported that overall loan demand is falling, bank credit standards are tightening and delinquency rates are edging higher. The survey also identified rising rates as a factor in diminishing loan quality as well as inhibiting consumer borrower sentiment.

 

Sources: Bureau of Labor Statistics, Federal Reserve Bank of St. Louis, Federal Reserve Bank of New York, U.S.Treasury, Bloomberg

 

Demand for Treasuries Drives Rates Lower – Fixed Income Update

As a result of the bank failures, there has been an increased demand for Treasury bonds as a safe haven while the turmoil unfolds and volatility increases. The surge in bond buying has in turn brought down interest rates and has driven bond prices higher. The flight to U.S. Treasury bonds drove bond yields down across fixed-income markets, simultaneously alleviating rates on mortgages and consumer loans. The average rate for a 30-year conforming mortgage loan fell to 6.32% on March 30th, a welcome drop for homebuyers nationwide.

Sources: U.S. Treasury, FreddieMac

 

 

 

Bank Concerns Send Stock Volatility Higher – Domestic Equity Overview

Despite the bank failures in March, all three major equity indices posted positive returns for the first quarter of the year. The Dow Jones Industrial Average, S&P 500 Index, and the Nasdaq all saw upward trends towards the end of March. Volatility did rise in mid-March as banking turmoil spread throughout the equity markets. Financial and bank stocks saw the most volatility as concerns about contagion became an increasing focus. Companies that provide essential goods and services continue to be beacons for investors, as confidence in smaller technology and speculative stocks became undesirable with the bank failures.

Sources: Dow Jones, S&P, Nasdaq, Bloomberg

 

 

 

U.S. Taxes Lower than Other Developed Countries – Taxation Overview

The notion that taxes in the United States are excessive compared to other countries, is somewhat misleading. Relative to other developed countries, the U.S. maintains some of the lowest tax rates globally. U.S. tax rates were much higher in the 1940s, reaching a top marginal tax rate of 94% in 1944, yet have fallen substantially over the decades in comparison to other countries. Since the Tax Cuts and Jobs Act of 2017, the top marginal federal tax rate in the U.S. is 37%, applying to incomes of over $578,125 for individuals and $693,750 for married couples filing jointly in 2023. In France, on the other hand, the top income tax rate currently reaches upwards of 45% for any individual earning €250,000 and 49% for individuals earning €500,000. In the UK, marginal income taxes can even reach 63.25% for certain individuals earning over £100,000. In Belgium, income taxes reach as high as 79.5%, more than double the highest marginal rates in the United States. Another interesting note is that U.S. top marginal tax rates kick in at much higher incomes, with most European taxpayers paying the top marginal rate with incomes between €100,000 to €200,000. Across the board, the U.S. has lower income tax rates than its European counterparts.

Sources: OECD, Internal Revenue Service, Belgian General Administration of Taxation, HM Revenue & Customs, French Ministry of Finance

 

Higher Mortgage Rates Keep Homebuyers from Buying – Housing Market

With interest rates breaching higher levels, mortgages are becoming less affordable for millions of Americans. As a result, demand for new mortgages continues to reach decades-long lows, influencing homebuyers to either wait for rates to fall or for home prices to drop significantly.

Economists believe that a unique dynamic has evolved from the current housing environment. Existing homeowners with low mortgage rates are hesitant to sell and move into a higher-rate mortgage, enticing homeowners to stay put. This in effect minimizes the inventory of homes available for sale and possibly acts as a price buffer for available homes.

The 30-year fixed mortgage rate reached 6.65% in early March, its highest point since November of last year. This comes amidst continuously higher mortgage loan rates that reached as high as 7.08% in October and November of 2022, a 20-year high that the housing market last saw in 2002.

Sources: Federal Reserve of St. Louis, Freddie Mac.

 

Travel Industry Rebounding from Pandemic Slump 

Travel & Tourism industry with March passing, it has officially been three years since the initial surge of the COVID-19 pandemic that shut down schools, in-person meetings, and disrupted most of the norms of daily life. While some industries benefitted from the new landscape created by the pandemic, the tourism industry entered into a major slump due to widespread travel restrictions. The world’s leader in tourism, France, saw 211 and 217 million tourists in 2018 and 2019 respectively. That number fell to just 117 million in 2020, a 46% drop that was apparent in countries across the world. The United States saw continuous declines in tourism since 2018, dropping over 72% from 169 million people in 2018 to 46 million in 2021. Other notable decreases include Spain, which saw a 71% fall in tourism between 2019 and 2020, Great Britain with an 85% drop between 2019 and 2021, and Japan with a 99% decrease between 2019 and 2021. Despite international tourism still suffering the effects of the pandemic, both 2021 and 2022 saw improvements. While it may take years, the recovery of international tourist arrivals shows that the world is making a return to normalcy. In Europe, the number of tourists in 2022 reached 74% of 2019 levels.

While these trends started in 2021, as can be seen in France having 25 million more tourists in 2021 as compared to 2020, then rising significantly in 2022. As for domestic travel within the United States, the TSA reported the most domestic travelers in July 2022 since December 2019, a dramatic rise from the abnormal lows of mid-2020.

Sources: Transportation Security Administration, OECD, Federal Reserve Bank of St. Louis, World Tourism Organization