Morning Market Commentary Q1 2023
During the first quarter of 2023 sentiment started off hot with great gains in January but had its ebbs and flows throughout the quarter. The belief that the Federal Reserve was going to be able to tame inflation and the economy would be able to establish a “soft landing” in terms of a possible recession led to market gains.
S&P, Dow, and NASDAQ
The S&P 500 gained 7.0% to kick off 2023. The Dow Jones Industrial Average lagged the overall market gaining a modest 0.4% mainly due to a transition into growth to start 2023. The tech heavy NASDAQ, however, had its best quarter since 2020 climbing by 16.8% for the quarter.
Hot Start to the Year
After a brutal 2022, the market did not waste much time in 2023. The headline Consumer Price Index (CPI) dropped to 6.5% from 7.1% mainly due to energy and food cost moderation. A stronger-than-expected GDP print of 2.9% along with the better inflation data led investors to believe that the Federal Reserve would slow the rate increases in the future. Risk appetites picked up despite expectations of slightly softer earnings growth and investors ran back into high-tech and consumer discretionary stocks.
The Fed Continues to Raise
The Federal Open Market Committee (FOMC) held their first meeting of 2023 and announced an additional 0.25% rate increase for the federal funds rate. Fed Chair Jerome Powell indicated that policy intervention was starting to work to tame inflation, however there was a consensus that rates may need to rise further than initially assumed to control inflation. Climbing month-over-month inflation, 0.5% in January after 0.1% in December, plus a lower revision to GDP but a still-strong 2.7%, led to weak sentiment amongst investors. Almost all sectors of the S&P 500 pulled back, but technology was resilient. Chipmaker Nvidia was a notable performer having posted strong results and announced increased involvement in artificial intelligence (+90.1% growth to start the year 2023). Energy was amongst the weakest sectors with investors eyeing potential cost pressures.
Bank Credit Crisis
Possibly the largest story in the first quarter of 2023 is the collapse of Silicon Valley Bank. SVB invested a large proportion of these deposits into Long Term Treasury bonds. As the US Federal Reserve continued to raise interest rates sharply, the value of these investments fell sharply, which is not good for a bank’s balance sheet. At the same time, higher interest rates caused funding for start-ups in Silicon Valley to start drying up and these companies began to withdraw deposits. To meet client demand, SVB sold $21 billion of securities, incurring a $1.8 billion loss. The news spread rapidly which caused a flurry of other withdrawals from SVB. Many other regional banks were named in the news as potential next victims of the SVB collapse sinking the financial sector valuation. Many other sectors decreased off the news of SVB with investors believing this could be the first leg of a potential recession around the corner.
Outlook for the Rest of 2023
Looking forward to the remainder of 2023, inflation continues to be the focus, as we monitor monthly reports to see a continuing decline in Year-over-Year inflation as well as stabilized monthly inflation numbers. Additionally, the banking “crisis” seems to be settling down with each passing day, but there is still some uneasiness. The bond market continues to price in a potential rate cut in 2023 with the belief that inflation and wage growth will continue to ease. Even though we have seen a decline in interest rates, current yields continue to look attractive as we navigate through this market volatility. With 1-year U.S. Treasuries at 4.67% and even Money Market Funds yielding 4.7%, we believe this is a good place to hold cash for the time being. We are even seeing banks provide attractive rates on 1-year Certificate of Deposits (CDs) yielding 5.05%. If you have any questions regarding current cash levels at your current Bank or advice on what to do with your cash, please do not hesitate to reach out to your advisor.
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