The S&P 500 had a solid month in March; up 3.5%.  But not everything rallied in March.  Small caps and mid-caps were down 3-5%.  Only 3 of 11 equity sectors are up March YTD.  And high quality stocks have been lagging all year as shown by the difference in performance between the Dow Jones (high quality blue chips) which is up 0.4% March YTD, and the S&P 500 (mixed quality) which is up 7.0% March YTD.  It is very unlikely we have been in a new bull market since the October lows without high quality stocks participating.

Two legs of our economy that have helped us avoid recession so far are now showing signs of weakness: retail sales and the jobs market.  Retail sales are slowing and the most recent employment-related data is disappointing.  For example:

–  JOLTS (job openings) and ADP (private payrolls) were weaker than expected.
–  The employment component of the ISM Manufacturing report was the lowest in over two years.
–  The employment component of the Services report is barely clinging to positive territory.
–  Both initial and continuing jobless claims were higher than expected.
–  Last Friday’s non-farm payrolls matched expectations but new jobs in March were down 30% from the average over the prior six months.

Still, with unemployment at 3.5%, it is hard to argue that the jobs market is a complete mess.  However, the overall employment weakness is adding to recession fears.  In our opinion, the odds of a recession later this year are growing and are over 50%.



The roll-off of huge spikes in inflation in the first few months of 2022 will lower the CPI reports in the months ahead.  We will likely see the year-over-year CPI at least in the 3%s and maybe in the 2%s by the time the June CPI print is released in mid-July.  The Fed’s inflation target of 2% is something we could easily be close to by June.  It is interesting to us that few economists are talking about this simple math.

First, let’s look at the actual CPI year-over-year percentages since the index peaked in June of 2022:




June 2022

9.06% (peak)

July 2022


August 2022


September 2022


October 2022


November 2022


December 2022


January 2023


February 2023



Next, if we assume 0.3% future month-over-month inflation, a reasonable assumption in our view, future CPI reports will look like this:



MARCH 2023

4.95% (actual March CPI released tomorrow)

APRIL 2023


MAY 2023


JUNE 2023


(Source:  Bespoke Investment Group)

Let’s say our 0.3% future month-over-month assumption is off.  Then what?  Well, if monthly inflation averages only 0.2%, the June 2023 CPI should be about 2.34% year-over-year.  If 0.4% monthly, then June 2023 will be about 3.16% year-over-year.

Consumer prices will still be well above levels they were at just a few years ago, but the year-over-year number that everyone talks about will likely be in the 2%s or 3%s (down from 6% now) by June or July.

Bond investors seem aware of this downward trend in inflation.  That plus a weakening economy have pushed yields down substantially since last October.  Stock investors seem paralyzed by the monthly CPI reports and are not convinced the Fed can come close to its 2% inflation target.