March 2023 Market Commentary

Written by Ayako Yoshioka, CFA

For the period February 1 – February 28, 2023.

Executive Summary

The positive sentiment that lifted markets in January waned in the month of February, as progress slowed in bringing down #inflation. This has led to expectations for additional #interestrate hikes in the future, alongside a higher terminal interest rate.

What Piqued Our Interest

The #bullish narrative that began the year, fueled by the notion that the #FederalReserve was nearing the end of its rate-hiking cycle, faded during the month of February. The decline in inflation we saw in January reversed when the #ConsumerPriceIndex was reported in February, registering a 0.5% month-over-month increase, its biggest monthly gain in three months. Validating these trends, the Producer Price Index was also stronger than expected, showing a month-over-month increase of 0.7% compared to a -0.2% decline in the previous month.

Economic data releases in February revealed an economy that was not as impacted by the #ratehikes from 2022—at least not yet. We saw that retail sales were still strong; thus, the consumer is still spending as the labor market remains tight. This strength in the economy is puzzling to many, given the tighter #monetarypolicy that is currently in place, but we have continued to highlight the relative strength and healthy balance sheets of both corporations and wealthy consumers. This is largely because many consumers and corporations took advantage of the low-interest rate environment that followed the ’08-‘09 Financial Crisis and locked in low long-term rates.

As you can see in Figure 1 below, in 2007, only 44% of U.S. #corporatedebt (of companies within the S&P 500 Index) had long-term (LT) fixed-rate debt. Fast forward to 2022, almost 80% of U.S. corporate debt is long-term fixed-rate debt. Similarly, a large majority of #homeowners with an outstanding #mortgage in 2022 had locked in rates near or under 3.5%. Thus, as the Federal Reserve increases interest rates, there is less outstanding debt that floats higher.

Figure 1. Breakdown of U.S. Corporate Debt – 2007 vs. 2022

Source: Bloomberg, Bank of America Global Research

This may also explain why corporate and high-yield spreads haven’t widened as much as one would speculate as the economy slowed...

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