Market Outlook · March 31, 2023

Making Sense: March Webinar

Brent Ciliano

CFA | SVP, Chief Investment Officer

Phillip Neuhart

SVP, Director of Market and Economic Research

Making Sense: March highlights webinar replay

Amy: Hello, everyone and welcome to the First Citizens Wealth Management webinar series, Making Sense, where Chief Investment Officer, Brent Ciliano, and Director of Market and Economic Research, Phil Neuhart, help you make sense of what's going on in the markets and the economy. You may have noticed we're down one Brent Ciliano today. Brent is traveling and making introductions to our new friends at Silicon Valley Bank, which you likely heard about in the news this week. And we are wishing him safe travels. He'll be back with us next month.

Before we get started today, I do have a couple of housekeeping items to get through. First, this webinar is being recorded, and a replay will automatically be sent to you following today's conference. Secondly, this webinar is interactive. If you'd like to ask a question, please use the Q&A or the chat feature on the righthand side of your screen. All questions are confidential and only visible to myself and Phil today. I do want to remind you we try to keep our discussion broad so if you have a specific question about your financial plan or we're not able to answer your question on today's webinar, please reach out to your First Citizens partner. As a reminder, the information you're about to hear are the views and opinions of First Citizens Bank and should be considered for educational purposes only. And Phil, with that, we're ready to go, so I'll turn it over to you.

Phil: Thank you, Amy, and good afternoon to everyone. I hope you all are well. I apologize for my pollen-infested voice, but we will jump right in. So given the events that occurred over the last two-and-a-half weeks, we're going to take a little different, a little bit of a departure, I'd say, from our normal format and discuss at a high level what has transpired and the corresponding impact to date in terms of the markets and the economy. So let's jump right in, Amy.

So what happened? One, liquidity concerns with select banks. As many of you have likely seen or heard in the media, we've had three US banks fail over the period of March 8th through March 12th. Further, on March 19th, Swiss Bank UBS group agreed to buy Credit Suisse via broker deal with the government of Switzerland. This has driven material repricing of Fed rate expectations and significantly heightened volatility in fixed-income and equity markets.

So what was the regulatory response as we flip ahead? One, systematic risk exception. So on March 12th, all these facilities were put in under the systematic-risk exception. Treasury Secretary Yellen instructed the FDIC, and I'm quoting here, "to complete its resolution of Silicon Valley Bank and Signature Bank in a manner that fully protects all depositors, both insured and uninsured," end quote. So that last part is important, protecting depositors both insured and those uninsured above the FDIC limit. More broadly, the Federal Reserve and Treasury also announced the Bank Term Funding Program, BTFP. Say that quickly 5 times. Which would provide loans up to 1 year in length to all federally insured banks in return for eligible collateral. The Fed facility would allow it, would value collateral at par rather than market value. So that's important. You have a Treasury that's collateral. It has depreciated as rates have gone up. You get to put that in as collateral at par. This would allow banks to fund potential deposit outflows without realizing losses on depreciating assets. So an important component. And then the discount window. Regarding the discount window, which is the lending program between banks and the Fed, the Fed stated that, and I'm quoting, "the discount window will apply the same margins used for the securities eligible for the BTFP, further increasing lendable value at the window," end quote. From the end, more liquidity into the system. So the government did act, and it seems to have, at least on the margin, helped.

Now, given this environment, we received a number of questions about First Citizens Bank specifically. This is outside of our normal discussion of markets and the economy. But we did want to share information that has been made available from our executive leadership team showing the size and capitalization of First Citizens Bank. As you can see here, well capitalized. I won't dwell on details as we have a lot to cover today, but this information and more is available at As always, please reach out to your First Citizens Relationship Manager if you have any questions.

So this concern in the banking sector, what impact has it had? Well, one, first, monetary policy. So what are we showing here? Here we're showing the implied Fed funds rate, the overnight rate, what the FOMC sets in the futures market by meeting date, all the meetings this year into next year. As of March 8th, the futures market was pricing a half-point hike in March and further hikes, 75 to 100 basis points, more hikes from the Fed. That's the gold bar here. Since then, this is the gray bar as of last Friday. Not only did the Fed only hike a quarter point last week, but the market thinks they're going to cut. Now, the Fed disagrees. In their own forecast, they're saying they're going to be at 5.1% at the end of this year. But the market thinks that the Fed is going to be forced to cut. We'll talk about this more later. But a major shift in the market that has had implications in both fixed and equity markets.

We also have seen Treasury yields fall. So when you see a flight to safety, what happens? People buy treasuries. Right, still the safest asset in the world, or viewed to be. When you buy treasuries, price goes up, yield goes down. You can see from March 8th to March 24th how much yields have fallen. Two-year yield down 1.3% as one example. And it's been a very volatile period in the fixed-income market. So the 2-year treasuries saw a movement of up or down 20 basis points, 0.2% or more for 7 consecutive trading days in March. That is the longest streak post 1970. So it not only felt like a bumpy ride, it really was and we did see that in the marketplace.

So US treasuries, we mentioned the yields have fallen. You can see the 10-year and the 2-year on the left side here. What's interesting is a sharp fall in yields, but still high versus history. A recent history, I should say. Additionally, the yield curve inversion. So what's yield curve inversion? That's when the 2-year Treasury is yielding more than the 10-year Treasury. And we're showing that on the right side. So yield curve has been inverted for some time now. That's viewed as an indicator of future recession. That inversion has narrowed as the 2-year yield has fallen more than the 10-year yield. Hard to read into what this means with all this volatility, but you are seeing a narrowing in the yield curve inversion which, yield curve inversion is in distortion, so in a way that is good to see.

So what about credit spreads? So what are credit spreads? Here we're showing investment-grade yield, they're yield spread above treasuries. So in other words, what do you pay for an investment-grade credit? What was the yield above the risk-free rate? Right, so when this line goes up, it means higher risk in the market. You can see the spike in 2020 during the pandemic. What's interesting is credit spreads have widened. They've risen in recent weeks. We're actually still below the levels of last October. So the credit market is not signaling true crisis at this point. It's signaling that there's some issues, but not true crisis. Interesting and honestly, pretty good to see.

And as I mentioned previously, bond yields remain elevated. So if you look at treasury, treasury yields, aggregate bond, et cetera, versus end of 2021 or beginning of 2022, depending on how you want to look at it, yields are materially higher. So yes, yields have come down, but there's still attractive yield in the fixed-income market. This is something we continue to hear from clients and is an important thing to keep in mind, even as yields have fallen.

Additionally, stocks remain above their October lows. In fact, the S&P 500's up 3.6% year-to-date through yesterday. That's hard to believe considering what the market's contending with, but risk assets have really hung in there pretty well. We'll talk more about reasons why the market might be up since October, but the truth is, risk assets are hanging in there. That is pretty good to see when you look at things like credit spreads and equities.

So let's turn to the economic update, Amy. So first, what was the state of the global economy coming into, sort of, these concerns around the banking sector? Well, one, 2023 was going to be a year of slower growth than in 2022. But what's interesting, if you look at consensus 2023 estimates, they actually rose from February to March. Look at World, look at US, look at Europe. So low numbers, but a bit of an improvement. Why is that? Things like the labor market in the US has hung in there. We'll talk more about that, it has remained pretty, pretty resilient in other parts of the economy as well. So it's interesting. We have these financial concerns. We have inflation. We're going to talk a lot about that. But at the same time, the underlying economic activity has still been pretty decent. Worth thinking about as we're coming into this, these concerns around banking.

All of that said, our recession probability is still 60% for the US. Why is that? Fed policy takes a while to feed into the real economy. Right, so it takes 6, 12, 18 months. We're just now getting to the point where we're feeling the impact of that policy. So we do still have a 60% chance of recession. We can talk about that more as well during Q&A. So what is on everybody's mind? Inflation. Here we're showing the consumer price index. Headline CPI peaked at 9.1% last year. It's still hard to believe that June of last year, we were at 9.1% inflation. It has fallen for 8 consecutive months to 6% in February, still far too high, but the direction matters. So we mentioned the market is up from, say, its October levels. Well, this is one of the reasons, right? You can't get to 2% until you get to 6%, right? So it is falling. Still too slow, still far too high. It's why the Fed's aggressive, but it is better than the alternative, which is continue to rise. A lot of work to do here, but an improvement.

So where might inflation go? We get a lot of questions on this, and justifiably so. This is consensus estimates in the gold bars, and consensus expects—and has for some time—inflation to moderate. And it has. You can see it in the gray bars that we have seen moderation in inflation down to 6% currently. And the black diamonds here are where was consensus in December, so 3 months ago. And some of those numbers have even come down from where we were in December. But what you'll notice is none of these numbers say 2% flat, which is the Fed's target, and the Fed continues to emphasize that they want 2% inflation. Well, I'm looking all the way out to the second quarter of next year, and you are still at 2.6% and that could be wrong, obviously. The trend is down, but inflation can be pretty sticky. There's reasons to believe it will be.

So when might the Fed stop hiking? What we're showing here is we're showing the Fed funds rate and CPI at the end of prior tightening cycles going all the way back to the 1970s. So what you'll notice is that the Fed funds rate is always above the rate of inflation when the Fed stops hiking, right? Today, that's not the case. Today, Fed fund rate's 5%. It is the top end of their range and CPI is at 6%. So when will those cross? When will the Fed funds rate exceed the rate of CPI? That is likely going to happen sometime in the second quarter. Now, it will be months before we know that. But that is what could happen. And it might give the Fed the green light to pause. Now, pausing and cutting are two very different things. We could talk about that more as well, but certainly we're getting closer. But we still have work to do. Either that's from CPI coming down or the Fed going up or both at the same time. So inflation's a big concern. Fed hiking is a big concern.

What has been resilient in this economy? Well that's been the labor market. So here we're showing nonfarm payroll gains or losses month to month. The US added 311,000 jobs in February. The average the last 6 months is 336,000. So when you think to yourself, why is the market hanging in there better than it might? Why is the economy doing fairly well? Well, this is why. We are a consumer economy, and the labor market has remained really surprising, resilient. If you had told me 12 months ago the Fed would hike as much as it has and the labor market would be as resilient as it has, I would say that that's really unlikely. So this has been what has surprised people. There's two sides to this coin in the side of wages, and it's tough for business owners. But in the end, it is good for the economy that we continue to see job gains. And the labor market remains really tight as we show in the next slide. There we go. Just a lag on my end. We have 10.8 million job openings in this country. On the left side, you can see where that compares to history. Really incredible. The job openings to unemployed ratio is 2.0, nearly 1.9. So you have nearly two job openings for every unemployed person in this economy. This is something we consistently hear when we are on the road with our clients, business owners. Maybe their top complaint right now is labor shortages. It was input costs. Still is. But boy, we hear about labor shortages consistently when we were out there with our clients. It is, it remains a major issue.

So let's talk about participation in that same vein. So labor force participation overall, as you can see on the left side, is still below the peak prior to the pandemic. Now, a lot of that is for structural reasons, and we're really showing that on the right side. Prime age labor force participation. So prime age is 25 to 54. It has actually gotten back to the pre-pandemic level. Right, but the issue is, is the baby boom has retired, right, outside of this age, 25 to 54. Participation is much lower than you would want. So what does that tell us? It tells us there are some structural issues. You can't just flip a switch and solve this. It takes population growth. It takes a lot of things to go right, education, et cetera. So labor force participation, I suspect on trend remains a topic that we're concerned about in this economy. That will ebb and flow with the business cycle but on trend, remains an issue. In total, it has improved below the previous peak. And all of this tight labor market, as the next slide shows, has driven wage inflation. So average hourly earnings year over year, 4.6%. The peak last year was 5.9% so better than that, but well above the long-term average of 2.9%. This is something we also hear a lot from our clients is I'm paying more wages and I still can't find workers. So a real concern. Good for the consumer, not good for business owners. So with that, let's flip to what is going on in markets.

Let's start with the stock market. Year to date, what has worked? So really what's worked is what did not work last year, i.e. growth. So growth stocks—large, mid and small—have outperformed value. That was not the case last year. The best-performing segment is large-cap growth year to date. Still early. We're not even a quarter in yet, but certainly you've seen a reversal of some of the big selloffs last year. Does that continue? It's been a pretty volatile year. I think it's too early to say that. But certainly some of the names that got hit really hard last year have bounced back. And so the point of that volatility on the right side, we're showing a very simple table here. It shows the weekly change in the S&P 500 each week this year. And what you'll notice is, most of these numbers are pretty big. I've highlighted, highlighted numbers of over 2% gain or loss in the S&P 500. And you'll see other big numbers there as well. It has felt bouncy, and it has been. One thing I will note is the most recent 2 weeks in the bottom of that table are up. So it's interesting. We're having concerns around banking. That really hits you the week ending the 10th of March. But the market has been resilient since then. So that tells you something about the confidence of the stock market in terms of the financial system. Interesting to see how it plays out, but it is good to see the rally the last 2 weeks.

So what might be some good indicators for the market? We show this chart regularly and we'll probably show it until the Fed stops hiking. But when you look at past cycles, at the point of the last Fed hike of the tightening cycle, slight chop in the 6 months leading up to it, and then generally the market tends to rally. Has the Fed stopped hiking? Well, that is a great question. The Fed would tell you no, that they think that they're going to go north of 5%. The Fed funds futures right now or as of this morning, are pricing roughly 50-50 odds of a hike or a Fed pause in the May 3rd meeting. So May 3rd is a long time from now in the world of markets. A lot can change, but there is a chance we've seen the last Fed hike, or we might see one more. Markets tend to like that. There's going to be a lot of other factors at play, but something to keep an eye on.

So another topic that comes up a lot is the US debt ceiling debate. And we showed this chart last month and maybe the month prior. But what impact might this have on markets this year? Well, we're showing 2011 impact. You can see the debt ceiling talks break down and there was a pretty, pretty notable selloff in stocks. There was a flight to treasuries. People fled to the risk-free asset, or perceived risk-free asset, and major volatility within the market. So when we think about this year and our expectation coming into the year that it was going to be bumpy, one thing we were talking about was the debt ceiling and that's remaining a topic. Lots of uncertainty here, lots of brinksmanship. We'll see how it plays out, but something to keep an eye on. It was not a good experience in 2011.

So let's talk about our views. Our S&P 500 price target is unchanged. Next, 12 months, 4,100. That's up about 3% from yesterday's close. Coming into this year, we expected volatility and had more downside to the bear case than upside to the bull case. You'll notice here there's asymmetry there. That's because we thought there was a Fed's hiking. Usually that causes some issues. It has. Debt ceiling, et cetera, so there are reasons to think we continue to bounce around, but the market is up modestly and we kind of expected it to be an up modestly year, but it's probably unlikely to get there in a straight line. What's more likely is we bounce around, given all of these issues within the economy. So you might ask, well, there's recession risk, what does that mean for markets? So here we're showing each recession post-World War II. You can see them listed here. You'll notice that in that third column, the recession length in months on average is 10 months long. Then the next column, during recession, during recession, what did the S&P 500 do? Well, this is the kind of surprising part. In the recession dates, the S&P 500 saw positive returns 15% of the time. The average returns 3.8%. The median 8.8%.

So, so why would the market rally in a recession? Well, the reason is the market's a forward-looking pricing mechanism. It in some cases priced recession before and was rallying once you're actually in recession. So we'll see this time around whether we have a recession or not, what the market does. But something was priced last year. We had a drawdown last year. Something was priced in the macro environment. Just remember, it's very hard to time markets just because you have a recession—even in that case, half the time that does not mean you sell stocks at the beginning of that recession. For long-term investors, which the, virtually all of our clients are, in equities or the vast, vast majority. When you look post the end of recession, 1, 3, 5, 10 years out, you see a lot of green, right? The real takeaway here is it's really hard to time markets. If you hold, if you hold assets, you reinvest dividends. You can't get excess return as you look ahead. So with that, Amy, I'll pass it back to you.

Amy: Thanks, Phil. And now I'll give you a little break and give you a chance to get a sip of water there. Thanks for pushing through today. I'll cover this last slide for you. If you're joining us for the first time today, this webinar is hosted every single month. Phil and Brent Ciliano, who is our Chief Investment Officer, talk about the markets and a lot of what you've heard today. Phil ran the gamut of all the hot topics today for us. But I just wanted to let you know that we have a number of resources available, including weekly videos, Q&A discussions throughout the month, and then, when deemed necessary, some written commentary around what's happening in the Fed or inflation reports and those types of items. If you'd like to get that information sent to you directly, we can send that to your inbox if you sign up using our, using this QR code or visiting That will take you to a subscription form and ask you for, ask you a couple of questions and get you signed up to get that information. I also want to mention that we have received a number of questions, including right now in the chat, about the Silicon Valley, Silicon Valley acquisition. The best place to get information on that is We have multiple teams working around the clock keeping that up to date and accurate for you and available. There was also an investor meeting yesterday morning and that call, that call for that replay is available on as well, and I would encourage you to listen in to that if you have questions about what that means for both parties.

Let's jump into questions, Phil. Hopefully you got a second to catch your breath because there are quite a few. Given the current banking crisis around sense, around Signature Bank and the other and the other one, the Silicon Valley Bank, do you think the Fed will continue to slow, its slowdown in increasing rates and for managing inflation, or will it keep moving forward?

Phil: Yeah, it's a great question. Look, I think if we want to be technical, they already did slow. I think they were leaning heavily towards hiking 0.5% in their meeting last week and they only did a quarter point. Now, the Fed has acknowledged, Chairman Powell acknowledged this in his meeting, something he talked a lot about, is when you have some concerns in the banking sector, financial conditions tighten up. And when you see tightening of financial conditions, that is similar to some number of rate hikes. There's a lot of diversity and opinion there. Is it half a percent? Is it one-and-a-half percent? But some amount of rate hikes equivalent. So they felt that they could slow the pace of hikes. Now, the Fed is saying at the end of the year, they're at 5.1%, which basically indicates one more quarter-point hike. The market's saying no, you're going to be cutting. So there's a wide berth between those two. I tend to think, and Brent does as well, that the Fed is going to be hesitant to have done all this work and start cutting very quickly. What's more likely, in our opinion, is that they really are going to want to hold on and not start cutting rates as dramatically as futures market prices, but we'll see if there's more concerns with the financial sector that might force their hand. But I think they're already kind of slowing down, to be honest. But cutting and slowing down are two very different things.

Amy: And Phil, in that same vein around the future path for the Fed, will the strong labor market numbers force the Fed to keep raising rates, even if the market continues to show volatility?

Phil: Yeah, that's a good question. So when you think about inflation, it's not just the price of goods and services. Right, it's the labor market. And we have a very, very tight labor market today, as we showed on slide 19. The 10 million job openings. 1.9 job openings for every unemployed person. And what that has done, as we showed on slide 21, is it has pushed up wages. So all else equal, the Fed is watching the labor market and that feeds into their inflation picture. I think it's one of the reasons they've hiked so dramatically. Now, the Fed and market participants understand that there is a lag. They hike. It does not immediately feed into the economy. It takes time. Some estimates are around 12 months. It varies, but some amount of time. So they know that all this work they've done the last year will take time to feed into the economy, which is why at some point they're going to pause and let it feed in. Are we there now? Maybe. Is there another hike or two? Maybe as well. But yes, the labor market, I think, has already forced the Fed's hand and we'll see what it does into the future.

Amy: Phil, this question is around the inflation target of 2%. Economists have been quick to point out that inflation targets have not been hit, to date, but they go on to say that inflation of 2% or 2.5% is expected at the end of 2024. And what are your thoughts there? And do you think they'll make it?

Phil: Yeah, so. So it's a good question. And we can pull up slide 16 so you can see economic consensus. What's interesting is, is the Fed themselves, if you look at their forecasts from last week, they're forecasting 2.5% inflation next year. Right, not two. Their target: two-and-a-half. Their long-term number is 2%. So they're acknowledging that, look, we aren't going to get to 2% quickly. Inflation is not something that's going to move really quickly in a quarter or two. It's going to take time. The path of inflation, I think, is a real, a real question. If you asked me, you know, over or under 2.6% next year in the second quarter, I'd say probably over. That's been a pretty safe, safe call over the last 2 years. But I do think the trend is lower and really that's what the market cares about. There's a reason that the market has cheered, moving from 9.1% to 6%. Well, 6% is way too high, but it's a third smaller than 9.1%. So it's the directionality. I do not see many out there saying we're going to be at 2%, say, you know, sometime early next year. What's more likely is it's going to be above the Fed's target and then we're going to be waiting for inflation to moderate.

Amy: Phil, moving into the discussion around the recession, that seems to be on the top of everyone's mind. This person is asking, do you anticipate a recession later this year?

Phil: Yeah, it's a good question. So our recession probability next 12 months is 60%. Clearly, it's not going to be in the first quarter. Looks like tracking for GDP is pretty positive in the first quarter. Why is it 60%, not higher and not lower? Well, we think odds-on recession, but it's not a slam dunk. We have a really strong labor market. We have a still strong consumer. But we do think, as we mentioned multiple times today, that the Fed funds rate going from virtually 0 to a top-end of 5% in the course of 12 months has an impact. Right, we think it does slow growth. It is not slow growth across the economy yet, but we do think that feeds in. So we remain at 60% recession probability. In other words, a recession at some point next 12 months, but not a slam dunk.

Amy: Well, Phil, thank you so much for answering all those questions and running through the various topics today and covering things on your end there. I want to thank everyone for being with us today. On behalf of all of us here at First Citizens, thank you for trusting us to bring you this information. It's something that we never take for granted. I hope everyone enjoyed this presentation. If your question wasn't answered, please reach out to your First Citizens partner. Our next webinar is scheduled for Wednesday, April 26th, at noon eastern, and we'll be sharing registration details in the coming days. Phil, thank you again and thanks everyone, for being with us today.

Phil: Thank you.

Banking sector worries in the midst of still-positive economic growth

This month, Phillip Neuhart discussed recent news from the financial sector, provided an update on markets and shared insights on the Federal Reserve's recent summary of economic projections.

Recent market events

Considering recent events within the financial sector, we took a small departure from our normal discussion topics to address concerns. So what happened? First, liquidity concerns caused three US bank failures from March 8 to March 12. Additionally, Credit Suisse was acquired by UBS Bank March 19 through a deal brokered by the Swiss government.

These bank failures ultimately led to a material repricing of rate expectations from the Federal Reserve, as well as significantly heightened volatility in equity and fixed-income markets. It's worth noting, however, that stocks remain well above October lows. For more details on the regulatory response and impact to markets, be sure to watch the webinar replay and review our recent market and economic development outlook (PDF). To learn more about First Citizens' acquisition of Silicon Valley Bank, visit

Economic update

Coming into 2023, global growth was expected to slow. But between February and March prints, annual global growth expectations have risen from 2.1% to 2.4%. They're still small numbers, but positive nonetheless. Driving this increase is likely the still-resilient labor market in the US, as well as inflation's continued slow but steady moderation since June 2022. Regardless, we believe there's a 60% probability that a recession will occur in the next 12 months simply because it takes time for Fed policy to make its way through the economy. We could see a downturn before the Fed's efforts to curb inflation come to full fruition.

Bottom line for markets

Our base case S&P 500 price target for the next 12 months is 4,100. We continue to believe markets will experience a bumpy road this year. Having the right balance between stocks and bonds as part of a thoughtful and strategic financial plan can help you reach your return goals.

This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.

Links to third-party websites may have a privacy policy different from First Citizens Bank and may provide less security than this website. First Citizens Bank and its affiliates are not responsible for the products, services and content on any third-party website.

Your investments in securities, annuities and insurance are not insured by the FDIC or any other federal government agency and may lose value. They are not a deposit or other obligation of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amount invested. Past performance does not guarantee future results.

First Citizens Wealth Management is a registered trademark of First Citizens BancShares, Inc. First Citizens Wealth Management products and services are offered by First-Citizens Bank & Trust Company, Member FDIC, Equal Housing Lender; First Citizens Investor Services, Inc., Member FINRA and SIPC, an SEC-registered broker-dealer and investment advisor; and First Citizens Asset Management, Inc., an SEC-registered investment advisor.

Brokerage and investment advisory services are offered through First Citizens Investor Services, Inc., Member FINRA and SIPC. First Citizens Asset Management, Inc. provides investment advisory services.

Bank deposit products are offered by First Citizens Bank, Member FDIC.

See more about First Citizens Investor Services, Inc. and our investment professionals at FINRA BrokerCheck.