First Quarter 2023 Review and Outlook

Written by Tim Rigby

The first quarter was a roller coaster for the markets.  According to The Wall Street Journal, the returns were as follows:

 			                                                                             Quarter		    Year

The Dow Jones Average 0.40% 0.40%

The S&P 500 7.00% 7.00%

The NASDAQ Composite 16.80% 16.80%

January started well for the stock market after a dismal 2022.  However, the Federal Reserve continued to raise short-term interest rates aggressively to slow inflation, causing volatility for the rest of the quarter.

The interest rate increases pushed yields on money market funds to 4%+ from almost zero over the last decade.  The increase occurred quickly and it took time for everyone to realize money market funds were attractive again.  The trickle of money out of low-interest accounts into money market funds became an avalanche and caused problems in the bank and brokerage world.  While most banks are well capitalized, several banks failed or were acquired.  The failed banks were known as “high-risk” and their failure was the culmination of years of poor management decisions, meaning they should be isolated cases.

It does point out when interest rates move dramatically, dislocations and other problems can occur (the bank world is just one example). The Federal Reserve has indicated they will finish their rate hikes soon (hopefully before something else in the financial system “breaks”).

February and March saw a decline in several areas of the stock market due to the bank crisis as money rushed to “safe” assets, but other parts of the market rose. Sectors like banks, brokerage firms, oils, and retail declined but large tech companies saw increases due to strong balance sheets. The returns noted above for the indexes outpaced most portfolios as large tech stocks are heavily weighted components of the indexes.  Our belief is a more broad-based rally will happen when the Fed convinces the markets they will end rate hikes and safely “land the plane” by avoiding a recession and curbing inflation. 

Inflation peaked last summer and has declined since.  Economic policy works on a delayed basis which means it takes a while for higher rates to slow economic activity. Lately, while the Fed has continued to raise rates, the bond market has started to anticipate rates peaking and has actually rallied.  Some of this decline in yields can be attributed to the flight to safety, but bond investors know inflation should continue to moderate as a result of the lag time needed for economic policy to work.

Have a great Spring and please call with any financial questions or concerns.  

Tim Rigby