By Rob Gee, CFA

Senior Investment Analyst, EQIS Capital Management, Inc.

Investment Strategy and Outlook

With the closing of the first quarter, we see some of the near-term headwinds ease a bit as continued tightening of monetary policy, hot inflation and rising interest rates all seem to be easing. However, the potential for a recession continues to be a significant headwind for US and global equities with exposure to the US. The turning point may only come when the Fed decides a rate-cutting cycle is necessary.

Deposits at banks continued to see outflows following the collapse in early March and extended the inflows into money market accounts. In the aftermath of the recent turmoil, regional banks may be pressured to raise capital, increase deposit rates to stay competitive and raise loan rates. All of these forces have the combined effect of constraining liquidity and tightening lending to businesses. The small regional banks account for roughly half of all commercial and industrial loans, 70% of all commercial real estate loans, and almost 40% of residential home loans. Any tightening in these sectors will impact jobs and consumers directly.

The macroeconomic impact of the rate hikes and tightening of liquidity in the system may lead to reduced lending to small and mid-size businesses as regional banks look to reduce lending or increase the borrowing costs for firms. Other companies may find it challenging to locate lenders willing to take on new business, and those with lower credit ratings may be unable to roll over debt when current loans mature. The near-term impacts on equity markets could a meaningful slowdown in earnings expectations for the remainder of 2023 and may lead to a broader risk-off sentiment to investors.

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