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.
The Fed continued its effort to combat inflation, raising the Fed Funds Rate by 0.25% in both February and March. Following strong economic data earlier in the quarter, the Fed held fast to rhetoric that it would fight higher prices at the potential expense of economic growth. While the market largely priced in the hikes in the first quarter, expectations are uncertain regarding forthcoming policy action for the remainder of the year.
The swift demise of Silicon Valley Bank and a small number of other U.S. banks created a crisis of confidence for the banking system at large. The reaction of the markets, perhaps having stirred up memories of the 2008/2009 global financial crisis, prompted government agencies to act quickly, supporting depositors and creating lending facilities for banks to access. By quarter end most contagion fears had subdued.
A Rebound in Fixed Income?
After suffering the worst year on record in 2022, fixed income markets rebounded in the first quarter, with the Bloomberg Aggregate Bond Index returning 3.0%.1 Amid incredible interest rate volatility and tightening central bank policy, interest rates ultimately ended the quarter lower than where they began as inflation readings continued to trend lower and market expectations for a Fed pause, and even cuts, later in the year grew.
A Stronger Rebound for Equities
U.S. markets saw a strong rebound in the quarter, with the S&P 500 Index returning 7.5%1. A sharp reversal favored large cap growth names, especially in the information technology sector. A shift away from financials, declining interest rates, and a preference for highly profitable companies in the face of recessionary fears fueled the surge. The financial sector accounts for a larger portion of the small cap space and the disruption in the banking sector disproportionately impacted small cap companies compared to large cap companies.
International developed equities were the standout in the quarter, as the MSCI EAFE Index returned 8.5%.1 A warmer winter in Europe and subsequent lower demand for fuel helped relieve concerns many had of Russia’s leverage over Europe as the primary commodity supplier. A weaker U.S. dollar further aided non-U.S. investments.
Emerging markets rose 4% in the first quarter1. Country performance was mixed. China benefitted from the continued strength coming out of Covid-19 lockdowns. Mexico continues to benefit from reorienting supply chains, or “near shoring,” following issues experienced during Covid. The Mexican stock market was up 20%2 for the quarter. India was a notable detractor, falling over 6% in the quarter1.
Commodities were one of the few areas of the market that saw negative returns in the quarter, falling 5.4%1. The energy market was the notable detractor for the asset class as natural gas prices tumbled on the back of a warmer than expected winter and concerns eased over Russia’s control of supply in the region.
Real estate markets saw positive gains at the surface (+2.7%1) but under the hood it was not all rosy. Areas of the market with strong cash flow, such as self-storage, industrials and data centers, drove the positive results. However, the office market continued to struggle (-15.9%1) as investors grappled with the impact that hybrid/work-from-home policies will have on the sector. Additionally, the banking sector turmoil spilled into the REIT market as regional banks have large exposures to the commercial real estate market.
It is likely the market stressors that popped up in March will fade into the background. We remain steadfast in our view that taking a diversified and disciplined approach to investing helps you achieve long-term investment objectives. Please feel free to reach out with any questions – we are here to help and serve you.
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