Taking a look at the May 2023 market outlook, IHT Wealth Management examines the recent banking challenges, labor market, and areas of opportunity for investors.

May 2023 Market Outlook for Banking Sector

As many saw in the headlines, the banking sector faced massive issues over the last few months. However, the big banks with the highest risk and worst operational execution have already been dealt with. Particularly, First Republic and Silicon Valley Bank both had unique circumstances that do not reflect the broader health of the banking system. Furthermore, while First Republic did not get closed until weeks later, it suffered the majority of its damage in the first few days of the banking crisis.

On the other hand, most of the other regional banks reported much smaller deposit declines and fewer liquidity issues. Generally speaking their deposit bases are have more insured depositors and face fewer concentration risks. Down the road, some of these regional banks may face issues generating high earnings, but the immediate liquidity issues are behind us.

May 2023 Market Outlook for Labor Market

The broader market faces recession risks as rate hikes and a pull-back in bank lending impact the American Consumer. At this point, a recession is nearly certain. The question is less whether “if” it occurs and more so pertaining to its magnitude. Will this trigger a hard landing or a soft landing?

Right now the job market is exceptionally strong, paving the way for a soft landing. However, if the banks start to be too restrictive in issuing new credit and the labor market starts to crack then the risks of a more severe recession elevate. The debt ceiling is also a concern. Historically the politicians have always come to an agreement, even if it comes at the eleventh hour – but the deliberating and time wasting does not inspire confidence for the markets.

Safety Bid for Tech and Stance on Energy

Technology is becoming a safe haven. Sector cash flows are exceptionally strong and most companies carry little debt, limiting the impact of interest rates. Furthermore, most of the tech sector has ample room for margin improvements.

Emerging markets look interesting – they are ahead of the United States in the battle against inflation. In fact, many South American countries are now pivoting towards rate cuts rather than rate hikes. China reopening after Covid is also significant.

Finally, energy is another space we are monitoring. While it is exceptionally volatile, companies in the space have become much more disciplined allocators of capital and have generally become much more shareholder friendly.

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To reevaluate your inflation strategy in 2023, contact the financial advisors at IHT Wealth Management.

Recently, you may have seen the headlines regarding Silicon Valley Bank collapse, creating implications for the financial system as a whole. If you looked at the performance of the financial sector over the past week or two you’d be excused for feeling a bit of panic. The deterioration in share prices slowly accelerated into a crushing run on two banks in two days. Given the way markets have been fluctuating over the past 18 months and the pressure the Fed has been putting on the market, we can understand how some people might jump to conclusions and think the financial system is finally cracking under the pressure of rate hikes and inflation.

We’re going to dive into this deeper, but lets start this reaction piece off by pressing pause on any panic you might be feeling.

Why Is The Financial Sector Under Pressure with Silicon Valley Bank Collapse

The financial sector has been under pressure as rate hike expectations have come back into focus. While we’ve had plenty of speculation around rate hikes over the past 18 months, the past week or two has seen the 2s – 10s spread expand rapidly. The 2s-10s spread is the gap between 2 year treasury yields and 10 year treasury yields. In normal markets conditions, longer maturity yields are typically higher than short maturity yields – governments or companies who issue debt have to pay more for investors to feel comfortable locking their money up for longer periods of time. However, in the current environment where rapid rate hikes are expected to be temporary, the yield of treasury bonds with shorter maturities is higher than the yield on treasuries with longer maturities.

This spread is important because the spread between long term and short term maturities can have a significant impact on bank profitability. Banks fundamentally operate in the business of borrowing short term money and lending it out to people for longer term projects. The most extreme example taking a customer deposit for say, $500,000, and then turning around and giving another customer a loan for $500,000. The bank has borrowed short term money from the depositor, and lent it out for much longer – for the sake of this example, lets say 10 years. The interest they make on the 10 year loan is used to pay for the bank’s operational costs, drive value for bank shareholders, and of course, pay the customer some interest on their savings account.

Read the full article in Forbes.

Want to reevaluate your wealth management strategy in 2o23? Contact the nationwide advising team at IHT Wealth Management today!