Markets end March on a high after tempestuous start

MANHATTAN (CN) — Wall Street was able to overcome a rocky beginning to finish March on the positive side of the ledger, though consumer confidence hints at problems to come.

For the week, the Dow Jones Industrial Average gained 1,036 points, while the S&P 500 increased 138 points and the Nasdaq netted 398 points. All three indices ended the month up, despite massive losses a couple weeks ago. The Dow began the month trading at 32,656 points; it ended the month at 33,273 points. Similar gains were seen in the S&P and Nasdaq.  

On Friday, much-awaited inflation data from the U.S. Bureau of Economic Analysis showed that the personal consumption expenditures index rose by just 0.3%, less than what experts had predicted. The report also noted that real spending fell by 0.1% as the economy continues to slow down after a 1.5% surge in spending in January.

In particular, food price increases have dropped for seven consecutive months, gaining just 0.2% last month compared with 0.4% in January. Prices for energy goods and services, which have see-sawed up and down the last few months, fell by 0.4% in February.

Experts are encouraged by the report but believe the central bank likely still has one more interest rate hike in the works, noting that annual and three-month-annualized interest inflation both remain above 4.5%.

“There’s still inflation in the system and the Fed’s job isn’t done, but [it] seems to be moving closer toward its terminal rate,” said Quincy Krosby, chief global strategist at LPL Financial, noting that the PCE report “does little to suggest that the Fed, absent any more upheaval in the banking system, will refrain from a May interest rate hike.”

The banking crisis earlier this month has caused a ruckus on Wall Street and likely has caused the Fed to pause in its approach to interest rates, but so far it seems not to have impacted consumers that much.

A trio of surveys show that a recession is the main issue worrying business owners and consumers. On Friday, the University of Michigan’s consumer sentiment index showed a drop from 67 points to 62. While the index is still higher than where it was in March 2022, the drop is the first time in four months the index has fallen.

“News about banks and financial markets are much less relatable to the typical American consumer than news about inflation, unemployment, or politics,” said survey Chief Economist Joanne Hsu, noting recent bank failures played a very minor role in the index. “However, if the current turbulence in the banking sector leads to tightening borrowing conditions, further deterioration of consumer attitudes is likely to follow.”

Earlier in the week, the Conference Board reported that consumer confidence edged upward this month to hit 104.2 on the index from 103.4 in February. Both the “present situation” and “expectations” indices also picked up. The confidence index still remains its average level from last year, however.

“While consumers feel a bit more confident about what’s ahead, they are slightly less optimistic about the current landscape,” Ataman Ozyildirim, senior director of economics at the Conference Board, said in a statement. He added that consumers’ expectations of inflation over the next year remain elevated.

Unlike the University of Michigan’s consumer confidence survey, which typically has its finger on the pulse of cost of living and inflation, the Conference Board is believed to more accurately reflect the labor market’s strength, experts say.

“Assuming stability returns to the banking sector, the improvement in sentiment points to ongoing healthy consumer spending growth in the near term,” wrote James Knightley, chief economist at ING, who speculates the rise in consumer sentiment is likely due to lower fuel costs, a tight labor market and rising wages.

Another survey by the U.S. Chamber of Commerce released this week found that that small business owners’ outlook on the U.S. economy has dropped slightly, with just 1 in 5 small business owners believing the national economy is in good health. However, nearly two-thirds of respondents also believe their own businesses are in good health.

“This quarter, small businesses’ concerns over inflation are soaring and their view of the broader economy is darkening, though they still report that their own businesses are in good health,” said Tom Sullivan, vice president of small business policy at the chamber. “Small business owners are pulling back a bit on spending as they see storm clouds in the economy appearing ahead.”

The survey marks the fifth consecutive quarter where inflation is at the peak of challenges, which 54% of the respondents put as their top concern. Revenue and supply-chain issues are the two next-highest concerns, with about one-fifth of respondents listing those as their top concern.

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