March 31st, 2023
Q1 2023 is now in the books, having handed investors a solid 7.03% gain in the S&P 500. The quarter’s gains were particularly impressive given that the market had to overcome a mid-quarter selloff, sparked by rising inflationary pressures and banking contagion fears following Silicon Valley Bank’s (SVB) collapse and Credit Suisse’s forced marriage to UBS. Swift Federal Reserve and global regulatory actions managed to successfully soothe markets by month’s end, however. Investor sentiment shifted strongly positive late in the quarter due in large part to renewed hopes the Fed will soon pivot on rates quicker than previously signaled. The silver lining in the regional bank mini-crisis is the Fed now expects tighter lending standards to cool the economy on its own without greater intervention from the Fed itself. Late quarter economic data helped matters as well. Investors entered 2023 comforted by the cooling trend observed in Q4 but began panicking in February when data suddenly inflected higher. By quarter end, however, many readings appeared to be returning to trend, comforting markets that a broader deceleration still remains underway. There were no two ways about it. Investors got a solid win this quarter, managing to sidestep all the madness March had to offer — off the basketball court at least.
This Week’s Highlights
This week’s economic releases fit nicely into a “deceleration but not an outright crash” scenario for the U.S. economy. Granted, a lot of releases we saw in March were for periods prior to the recent banking hiccup, but looking at the data and trends, the overall impression is that the Fed’s actions are working to moderate conditions even if things are not where they ultimately need to be. Evidence of this was seen broadly this week, starting the week’s marquee data release – the personal income and expenditures report. The report showed that the core PCE price index (YOY) declined to 4.6% relative to January’s 4.7% while the headline PCE price index declined to 5% from 5.3%. The PCE is the Fed’s preferred inflation gauge, and while February’s figures are still well above what the Fed will find acceptable, they will be encouraged by what they see within the report. For context, November’s PCE price index was at 5.7%, down from 6.1% in October. The fuel driving inflation has been the strength of the job market, personal income growth, and consumers’ propensity to spend. The PCE release showed that personal income grew 0.3% in February (3.6% monthly annualized), down from 0.6% in January (7.2% monthly annualized). On the spending side, personal consumption expenditures slowed to 0.2% in February (M/M) relative to January’s 2.0% (M/M) growth. January’s income and expenditure figures were two readings that really spooked the market in mid-February, and seeing those data points return to trend played a big role in the improved sentiment this week.
Secondary economic readings supported the theme seen in the primary reports. On the housing volume side, pending home sales grew more slowly in February relative to a strong January (0.8% compared to 8.1%), while on the pricing side, the Case-Shiller 20-City Home Index grew at an annualized rate of 2.5% in January compared to 4.6% in December. On the jobs front, initial jobless claims for the week of March 25th ticked higher to 198K from 191K the week prior, yet still hover around historic lows.
It seems anything that confounds the Fed is appreciated by markets these days. Having tried to front-run the Fed in the early part of the quarter, markets sold off in February as hotter data and Fed-speak grew more aggressive. The implication in this was that the Fed was prepared to take rates higher and to keep them there longer, resulting in an increased risk of overtightening and causing something to break in the economy. Three weeks ago, it looked like that “something to break” just might be the banking sector. With that now contained, it’s ironic that the market has found solace within a crisis and rallied on the Fed’s reluctance to be aggressive with rates so long as memories of SVB and other regional bank troubles remain fresh. Never let a good crisis go to waste we suppose. In fairness, we’re already in restrictive territory so any pause in Fed hikes might simply allow previous actions to continue rippling throughout the economy and slow things further. The strength in January’s data (released in February) will probably prove to be an outlier within a moderating trend. February’s readings provide a basis for this belief, but we’re still a long way from normal price levels, inflation is still persistent in many places, and there are likely to be a few more bumps in readings along the way. It is almost unimaginable that investors were not only spared — but have profited — during March’s banking madness, but they should be wise and stay sober to the fact that the Fed’s work is still far from over.
The Week Ahead
The year is flying by with the Easter holiday around the corner. In observance, markets will be closed on Friday April 7th. The next edition of Week in Review will be published on April 14th and will include the latest inflation and retail sales figures.
Happiness Around the World
Earlier this month, the annual World Happiness Report was published by the United Nations Sustainable Development Solutions Network (UNSDSN), a non-profit launched in 2012 to conduct research to help policymakers and world leaders address a range of environmental, social, and economic development topics.
The World Happiness Report is based on data gathered in cooperation with Gallup, Inc., a research company based in Washington, D.C. Typically, one might consider higher household incomes, strong economic growth, and low unemployment as indicators of a happy society, however, Gallup researchers ask respondents in more than 150 countries to consider their individual life satisfaction and emotional wellbeing. Specifically, the study asks participants to think of a ladder, with the best possible life for them being a 10, and the worst possible life being 0. Individuals are then asked to rate their own lives on that 0 to 10 scale. The data from the three most recent years is used to make the sample size large enough to reduce random sampling errors. A typical annual sample for each country is 1,000 people.
The UNSDSN explains on their website that the World Happiness Report grew out of a determination to “find the path to greater global well-being” and the report has been based on two key ideas, (1) that happiness or life evaluation can be measured through opinion surveys, and (2) that we can identify key determinants of well-being and thereby explain the patterns of life evaluation across countries. The UNSDSN writes that the information “can help countries to craft policies aimed at achieving happier societies.”
The researchers note that a society can be doing well economically based on factors mentioned above, but there can be a divergence at the individual level, noting that a population will only experience high levels of satisfaction if its people are pro-social, healthy, and prosperous. This dichotomy — along with gaps between the happiest and the least happy — are some of what the researchers seek to uncover and better understand.
The 2023 study reveals a bright spot. There was a global surge of benevolence – a pre-disposition to do good and help others – in 2020 and 2021. Data for 2022 show that pro-social acts remain about 25% more common than prior to the pandemic. Covid made us kinder to our communities. Additionally, according to the report, life evaluation averages are “remarkably resilient,” with global averages from the past three years similar to those from before the pandemic.
Furthermore, war has had an interesting effect in Ukraine and Russia. The researchers write that during 2022, “benevolence grew sharply in Ukraine but fell in Russia. Despite the magnitude of suffering and damage in Ukraine, life evaluations in September 2022 remained higher than in the aftermath of the 2014 annexation.” The report adds that Ukraine is now supported by “a stronger sense of common purpose, benevolence, and trust in Ukrainian leadership.”
When countries score high in the study, the World Happiness Report researchers then correlate those results with a number of factors to explain the findings. Note that the data is not used to determine the findings. These other measures include a healthy life expectancy, GDP per capita, social support in times of trouble, low corruption and high social trust, generosity in a community where people look after each other, and freedom to make key life decisions.
Let’s dive into the results. For the sixth year in a row, Finland is the world’s happiest country. According to Frank Martela, a Finnish philosopher and psychology researcher, some of the reasons why people in Finland are so happy is because they don’t compare themselves to their neighbors, don’t overlook the benefits of nature, and don’t break the community circle of trust. Finland is willing to share its secret to happiness by offering a free four-day “masterclass of happiness” to help travelers find their “inner Finn” with the help of expert coaches who guide participants in Finnish philosophy and life balance. Finland’s Nordic neighbor Denmark took second place in the 2023 World Happiness Report. Iceland, Israel, and Netherlands were third, fourth, and fifth respectively. Sweden and Norway took sixth and seventh.
War-torn Afghanistan and Lebanon remain the two unhappiest countries in the survey, with average life evaluations more than five points lower (on a scale running from 0 to 10) than in the ten happiest countries. The United States rose from #18 last year to #15 this year. Rising from the #52 spot to the top 20 this year is Lithuania, which is considered one of the safest places to live in the Baltic region and has a relatively high standard of living combined with low costs.
Top 20 Happiest Countries in the World
- New Zealand
- United States
- Czech Republic
- United Kingdom
The full research report is available here. All of us at Probity Advisors, Inc. wish you a very happy weekend.