April 27, 2023
Despite renewed inflation concerns and a banking crisis, equities gained about 7% during the quarter and bonds added 3% as interest rates fell.
January was a quiet month and by February 2nd, stocks were up 9.7% to start the year. The rally was short-lived. The jobs report released on February 3rd showed strong hiring with a net 554,000 jobs gained, more than 3x what economists were forecasting. That was followed 11 days later by a hotter-than-expected Consumer Price Index. A week after that, the Fed’s preferred metric of inflation, Core Personal Consumption Expenditure read 4.7% YoY, rather than the 4.3% analysts were calling for.
Investors were looking for a softer job market and subdued inflation print, that would prompt the Fed to ease its interest rate policy. However, the hotter economic data moved market expectations for rate hikes and caused a selloff in equities. In early February the market was expecting Fed Funds to finish the year at 4.375%. On March 8th those expectations had moved to 5.625%.
Over the next four days, Silicon Valley Bank and Signature Bank failed, shocking global markets. The yield on the 2-year dropped 1.02% in three trading days (from 5.05% to 4.03%), a move not seen since 1987. In my first full year on Bank of America’s Treasury Trading desk, the 2-year spent all of 2012 trading between 0.21% and 0.41%.
The stock market bottomed out on Monday, March 13th, giving back nearly all the gains for the year. Luckily for investors, the next few weeks saw calming fears over banking contagion and inflation reports in line with expectations. This led to a 6% rally in stocks allowing us to close out a strong quarter.
- International Stocks performed well, gaining 8% in the quarter.
- The first quarter was a reversal of 2022 with growth stocks outperforming value stocks by 13% and the tech heavy Nasdaq posting a positive 21%.
- REITs continue their poor performance, trailing the broader market again. Over the last decade, real estate has underperformed the S&P 500 by more than 7%. Do not expect that trend to continue.
- The Federal Reserve hiked interest rates by 0.25% at both meetings, bringing the Fed Funds Rate to 4.875%.
- Despite the Fed’s hikes, interest rates declined in the wake of the bank failures. Medium and longer duration treasury yields dropped 0.3%.
- Gold had another good quarter, finishing up 8%. Oil on the other hand declined 5.6% in the quarter.
- Housing prices continued their pullback, falling another 2% in the last three months.
- Bitcoin was the biggest winner this quarter, with the speculative asset up a whopping 72% to $28,433.
Looking Forward - Bank earnings will be closely scrutinized this quarter. If the problems we saw with SVB and Signature seem to be isolated the market should rally. If larger names reveal problems with their assets and loans, stocks will sell off. Inflation will continue to be closely watched as will the general health of the economy. We’ve seen a bit of an uptick in Jobless Claims, but the numbers are still at low levels.
Job gains and unemployment continue to suggest a strong labor market. Abroad, OPEC surprised the market with a production cut at the start of April. Higher energy prices won’t help economic growth and will make inflation more persistent. The war in Ukraine feels stalled as both sides fight for Bakhmut, but that could change at any moment.