Economic Outlook – Spring 2023 | “A Resilient Market”

The first quarter of 2023 continued to display a market of mixed emotions and uncertainty. The Federal Reserve (The Fed) continued their battle against inflation by increasing interest rates. This revealed cracks in some banks’ balance sheets with deposits leaving or paying more, while longer term loans were still held at lower rates. Despite these challenges, markets ended the quarter modestly higher; the S&P 500 was up 7.50%, and the Bloomberg Aggregate Bond index increased 2.96%. Looking ahead, these questions remain: Are markets facing a looming recession? How severe could a potential downturn be? How much have markets already priced in? We explore the current data and indicators to provide insight below.

Inflation, The Fed, And Market Interpretation

As of 3/31/2023, the target Discount rate set by The Fed is 4.75% – 5.00%. up from 0.00% – 0.25% just 1 year ago. As of late, The Fed increased the rate 50 basis points (bps) since January; 25 bps in both February and March, which is off the 75 bps clip they were raising through 2022. Fed Chair Jerome Powell has made it clear that The Fed will remain committed to fighting inflation and that no cuts are expected in 2023, however, a disconnect seems to exist between what the Fed is saying and market expectations. Fed Fund Futures, a collective consensus of large institutional investors’ expectations of future short-term interest rates, are pricing in possible cuts as early as September.

From Lagging Consumer Price Index (CPI) data below, we can see that inflation has eased off its highs in June 2022. March CPI data released in April showed year-over-year headline CPI rose 5.0%, down from 6.0% the month prior and the 6th consecutive month of year-over-year declines. Will these numbers be enough to support the market’s expectation for rate cuts?

Figure 1. Source | and

The Yield Curve

The yield curve is still inverted. As mentioned in our previous update, the yield curve offers insight into the broad market’s expectation of future rates. Short-term rates out 1 month are priced to increase slightly and then decrease thereafter. This confirms the market’s expectations of one more potential hike by The Fed, and potential cuts later this year.

Figure 2. Source |


Again, it is worth noting that inverted yield curves have preceded the last major recessions. The below chart illustrates the spread of a 3-month U.S Treasury Bill and a 10-year U.S Treasury Note, which has continued to widen since our last update. As of quarter end, the 3-month Bill was yielding 1.37% more than the 10-year Note.

Figure 3. Source |


The Banking Sector

March led off with the failure of Silicon Valley Bank and Signature Bank. They put themselves in a vulnerable position by holding mostly long-duration bonds, whose value was hurt badly by rapid interest rate increases. Unrealized losses became realized once those bonds had to be sold to meet rapid depositor withdrawals. The FDIC ultimately stepped in to make all depositors at those banks whole in order to limit the risk of wider financial-system strain. While the banking sector appears to have stabilized, the S&P 500 Bank Index is still down 14.5% since the start of 2023.

Figure 4. Source |


Manufacturing And Services Sectors

The Purchasing Managers indexes for Manufacturing and Services are often viewed as leading indicators of overall economy activity. A reading above 50 can be roughly translated as companies expecting to purchase more in the next 6 months than they did in the preceding 6 months. A reading below 50 means more companies are indicating they plan to purchase less. Since the 4th quarter of 2022, the manufacturing index has dropped below the 50 mark, and continued to decline. Service activity in the economy is still above 50 but has been trending down.

Figure 5. Source |



In our last update we briefly touched on the housing market, and it is worth highlighting again. Below is a chart representing the national Home Price Index and the average 30-year mortgage rate from Freddie Mac since 2000. We can see slight, but welcomed, reprieve of mortgage rates from the last update. Low levels of housing inventories and falling home starts are still causing home prices to be relatively elevated.

Figure 6. Source | and


The Housing Affordability Index data released by the National Association of Realtors uses data on home prices, mortgage rates and average wages to get a measure of how well the average consumer can afford a home. This index posted a reading above 100 as of January 2023, rebounding slightly from the lows in October but still well below levels from the same time last year. We will have to see how these lower levels of affordability affect the housing market for the rest of 2023.

Figure 7. Source |


The Labor Market

There are still high levels of job openings compared to job seekers. With recent headlines of layoffs in the tech sector, and potentially more in the future, we could see the number of openings continue to move lower from highs last year.

Figure 8. Source |


Due to the high number of job openings, unemployment continues to remain low. Wage growth has started to slow recently but still remains at historically high levels.

Figure 9. Source |


The Bottom Line

How do all these pieces fit together in a forward-looking projection? Fed Chair Jerome Powell has reiterated the Fed’s intention to carry out its mission of achieving full employment and price stability even if some “pain” is inflicted on markets. If inflation continues to stay stubbornly high, and un-employment remains low, The Fed will continue to raise rates. If wage growth continues to slow, bringing inflation down further with it, and manufacturing and services activity continues to weaken, The Fed may pause or even begin to lower rates. Markets are certainly pricing in a pause and future cuts based on the information shared above. We believe a recession is likely at this point. The length and the severity of the contraction is still to be determined.

Given the uncertainty in equity markets, and the weakening economic picture, we continue to keep our portfolios conservatively positioned. The first quarter of the year has seen a rebound in markets off the lows of 2022 but we believe there continues to be risk to the downside. If you have any questions about the current market environment, please don’t hesitate to call us. We look forward to helping.

Contact Our Trust Department


Eric Haugdahl – Investment Associate

Keith J. Akre, CFA, CFP® – Vice President & Trust Officer

Opinions expressed are solely our own and do not express the views or opinions of Stillman Bank. Investments available through Stillman Trust & Wealth Management (1) are not FDIC insured (2) are not deposits, obligations, or guaranteed by the bank and (3) are subject to investment risk including possible loss of principal.