ECONOMIC RESILIENCE AMID BANK FAILURES AND RATE HIKES
In the past 6 months, the US economy has defied expectations, surprising economists and investors. Initially, concerns loomed at the start of the year about a 2023 recession due to the Fed’s rapid interest rate hikes. March and April saw three of the largest bank failures in US history, echoing the lead-up to the 2008 Financial Crisis.
However, since March 12th, the S&P 500 has risen 16%, the economy added more than 1.1 million jobs, and economic growth has remained steady around 2%. It begs the question – how can the economy withstand higher interest rates and bank failures, and continue seemingly unfazed?
One contributing factor is the enormous amount of money still in the economy leftover from COVID stimulus programs. One way to measure this is through aggregate checking account balances. While this doesn’t capture all forms of money in the economy (it excludes physical cash, bank CDs, money market funds, etc.), it is a reasonable measure of potential spending power.
As of June, US households had $4.4 trillion in checking account balances. This represents a 366% increase from the $1.2 trillion they held at the end of 2019. At the same time, business balances totaled $1.9 trillion, up 50% from $1.3 trillion at the end of 2019.
In the chart below, we compare the combined balances of household (blue) and business (grey) checking accounts (nearly $6.4 trillion) relative to the size of the US economy. Currently, checking account balances are equal to roughly 24% of the gross domestic product; the highest level since the early 1950’s. This is a stark contrast to the 3.5% level we saw in 2007 ahead of the 2008 financial crisis.
Despite the Fed’s fastest rate hiking cycle since the 1980’s, the economy continues to expand at a moderate pace. While we should expect balances to decline over the coming quarters, in aggregate, households are in far better shape than they have been in decades. This should continue to support economic growth and help offset any weakness seen in other parts of the economy.
If your funds are parked in your local bank, it’s worth taking a moment to review the interest rate they’re offering. Given the significant increase in yields over the past year, you could potentially earn around 5% on safe investments. Get in touch; your SEIA advisor stands ready to assist.
ASSET CLASS SUMMARY As of 09/28/2023
Global Ex U.S.
U.S. Real Estate
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: U.S. Stock (Russell 3000 Total Return), Global Stock Ex U.S. (MSCI ACWI Ex USA Net Total Return), U.S. Bond (Bloomberg US Aggregate), Global Bond (Bloomberg Global Aggregate), U.S. Real Estate (Dow Jones US Real Estate Index Total Return)
SECTOR SUMMARY As of 09/28/2023
Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Market segment (index representation) as follows: Consumer Cyclical (Consumer Discret Sel Sect SPDR® ETF), Financials (Financial Select Sector SPDR® ETF), Materials (Materials Select Sector SPDR® ETF), Energy (Energy Select Sector SPDR® ETF), Industrials (Industrial Select Sector SPDR® ETF), Technology (Technology Select Sector SPDR® ETF), Consumer Defensive (Consumer Staples Select Sector SPDR® ETF), Health Care (Health Care Select Sector SPDR® ETF), Utilities (Utilities Select Sector SPDR® ETF).
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