Equity and fixed income indexes posted modestly positive returns overall with year-to-date trends for 2023 continuing in April; longer duration outperformed shorter duration, credit outperformed Treasuries, international developed equity outperformed the U.S. and emerging markets and commodities took another step back.
Markets grappled with countervailing forces in the first quarter, but ultimately the bulls won the day with prices broadly up in the first three months of the year. On the positive side, strong economic data provided renewed hope for a “soft landing.” On the negative side, the bears roared to a crisis of confidence in banking and falling corporate earnings. The Federal Reserve landed in the middle, sticking to its rhetoric of fighting inflation but doing so with modest rate increases.
Employment, retail sales, manufacturing, and inflation all showed signs of improvement to start the year. The strong economic data has pushed market expectations to at least another 0.5% move up in rates by the FED by year end. Equity markets mostly fell on the positive headlines. But why? The irony of positive economic surprises is markets interpret that as the Fed having to increase rates even more to cool down the economy and inflation.
Broadly, asset classes kicked off the new year higher after a not-so-jolly December. Sentiment turned decidedly positive based on slowing wage and job growth and cooling price pressures.
A brief recap to note some notable events: Russia invades Ukraine, the FED (and other central banks) began their fight against inflation (which peaked at 9.1% annually in 2022) by raising interest rates, China’s sporadic lockdowns strained global supply chains and oil prices (WTI crude) topped out at $119 a barrel.
Equities rallied on the back of softening inflation data and a “Fed pause” mentality in November. The Federal Reserve reiterated its commitment to combat inflation but pivoted to a tone hinting at the potential for a slowing pace of hikes in 2023.
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