After a rough 2022, investors were looking forward to a fresh start in the new year. What started out as a decidedly positive quarter in the markets, turned negative in February, and ended on a mixed note in March. The headline development of the quarter was the “run” on several banks and subsequent bank failures. This had rippling effects across the capital markets and economy, leaving investors unsure of what lies ahead.
Market and Economic Review
2023 Q1 Market commentary: The capital markets have delivered a mixed bag of returns so far this year. Large U.S. companies, as defined by the S&P 500 Index, returned 7.5 percent through March 31st. Many areas of the market that performed better last year are now lagging and vice versa. Returns are widespread, ranging from 17 percent for the technology-heavy Nasdaq index to -1 percent for small cap value equities (ishares Russell 2000 Value index). International markets fared well this quarter with the MSCI ACWI ex-U.S. Index returning 7 percent for the quarter. Fixed income returns are positive as the market anticipates interest rates to level out this year. The Bloomberg Barclays Aggregate Index, a broad barometer for fixed income, returned 3 percent this quarter.
The biggest news of the quarter was the collapse of Silicon Valley Bank, the 16th largest bank in the country, as well as Signature Bank. In early March, the U.S. government seized both banks when they were unable to meet customer withdrawals. Silicon Valley Bank, in particular, was mismanaged with a customer base that was highly concentrated in the technology and venture capital areas of the market. In addition, the longer-term bond investments of both banks were at a loss and therefore not sufficient to meet customer withdrawals.
The U.S. government stepped in to provide assistance to the banking sector in an effort to calm customer anxieties. Some of these measures included unlimited FDIC insurance for depositors of the affected banks and relaxed lending rules for banks to access capital. While these programs eased concerns temporarily, the models used to assess financial stability of banks are now under scrutiny. The financial sector of the S&P 500 Index lost 5.5 percent this quarter.
These issues had a spillover effect as the stability of banks around the world was called into question. In mid-March, the Swiss central bank brokered a takeover of Credit Suisse by UBS. Without this rescue, a “run” on Swiss banks would have been inevitable and could have negative ramifications on the global banking system and economy.
These actions called into question the ability of the Federal Reserve (Fed) to continue raising interest rates to fight inflation. At their meeting in early March, the Fed raised interest rates by 0.25 percent, which is half of the move that the market was expecting prior to the banking issues. While the Fed maintains there is more work to do on fighting inflation, it remains to be seen how aggressive they will be in 2023.
Inflation in the U.S. has tamed somewhat, yet remains high. The February Consumer Price Index (CPI) report showed inflation of 6 percent, which was in line with expectations. While inflation is roughly 1/3 lower than it was in mid-2022 (9 percent), the figure remains persistently high as prices for various goods and services fluctuate. A decrease in energy prices helped bring inflation down in recent months, but food and shelter costs are still rising.
Despite high inflation and rising interest rates, the job market has proven to be resilient. However, the March jobs report showed some easing in the demand for workers. Weekly jobless claims, which are typically an indicator of layoffs, have risen from historic lows. Job openings have also declined. Companies are looking for increased efficiency in their business models and planning for how they can do more with fewer resources. First-quarter earnings releases will be a good indicator of what companies are anticipating and may be a barometer for economic expectations.
What does this 2023 Q1 market commentary mean?
Despite the volatility of the first quarter, the markets generally posted positive returns. However, given the uncertainties that lie ahead, a choppy ride should be expected. Will inflation continue to fall? Can the Fed continue to raise interest rates without slowing the economy too much? Will the labor market cool? Will we have more bank failures?
The events of the first quarter remind us how quickly the markets can turn. This also reiterates the importance of maintaining a well-diversified investment portfolio in alignment with your long-term financial goals so you can weather unexpected storms.
If you have questions about setting up a financial plan, would like a second opinion, or want to learn more about how to diversify a portfolio, we’re always happy to start a conversation. You can get in touch with us by calling 855-855-5455, or emailing [email protected]!