Quarterly Commentary

 Market Overview 

 Hopes for an economic soft landing and the Fed signaling that rate increases may be coming to an end led to solid gains in the S&P 500 in the first quarter of 2023. Markets began the quarter on a strong note as inflation indicators continued to fall. This was coupled with fairly resilient economic data, including the labor market. Earnings reports began in mid-January and further buoyed the market as they were overall better than expected. February was another story as declining inflation numbers stalled and a still- tight labor market implied further rate increases in the near future. After gaining 6% in January, the S&P 500 declined just over 2% in February. March added a new twist to the debate over how high interest rates would go as several financial institutions stumbled, highlighted by the failures of Silicon Valley Bank and Signature Bank of New York. The Federal Reserve and the Treasury Department found themselves having to create new lending programs to support the regional banking market and even going so far as to implicitly guarantee all deposits nationwide. Despite these events, the FOMC raised rates by a quarter percent in March and signaled that the committee was close to the end of their increase cycle. On this news, the S&P 500 rallied into month-end to finish with a small gain. 


We witnessed a reversal in index and sector performance in the first quarter relative to 2022. The NASDAQ, which underperformed in 2022, handily outperformed in the first quarter. The outperformance was largely driven by declining bond yields that, effectively, make growth-oriented companies such as Apple, Alphabet, and Amazon appear attractive. The S&P 500, which is likewise, tech-heavy, followed behind the NASDAQ while the DJIA and Russell 2000 lagged behind but still had positive quarterly returns. 

By market capitalization, large-cap outperformed small-cap, as they did throughout 2022. Small-cap stocks suffered mainly as a result of funding concerns that arose from the late-quarter banking problems and from rising interest rates. Rising rates historically affect smaller companies that depend on borrowing to finance growth. By investment style, in a reversal from last year, growth stocks outperformed value. Value stocks, which have larger weightings toward financials, were weighed down by aforementioned concerns over the stability of regional banks.

On a sector level, seven of the eleven sectors in the S&P 500 were positive for the quarter. Notably, the three top performers were the three worst performing sectors for 2022, two of those being the communications sector and the technology sector. This followed on the theme of strong performance in the internet-focused tech arena and a rotation toward mega-cap stocks. The third sector that performed well was consumer discretionary stocks. These companies rose on the tailwinds of the internet-based theme as well as data that showed consumer resiliency. Sectors that lagged included financials, energy, and health care. Financials sold off late in the quarter as a result of the regional banking problems while energy declined due to the prospect of declining global demand. 


Internationally, foreign markets largely traded in line with the S&P 500 during the quarter. Foreign developed markets marginally outperformed the broad-based U.S. market index as economic data in Europe was better than expected and European banks were deemed, for the most part, insulated from the U.S. banking problems. Emerging markets were also positive yet lagged the S&P 500 due to an elevated level of geopolitical stress. 


Commodities saw sharp declines in the first quarter primarily due to weakness in oil markets. Rising global recession worries and subsequent reductions in demand expectations outweighed any concerns over geopolitical factors that typically push crude prices higher. Gold prices rose during the quarter as investors sought a store of value amidst the regional banking concerns. 

Fixed Income 

Switching to fixed income, the leading benchmark for bonds (Bloomberg Barclays US Aggregate Bond Index) realized a positive return during the quarter despite early volatility. The rally was a result of an increasing belief that the Fed rate increases would soon end and that the regional banking crisis added to the prospect of a late year recession and subsequent rate easing. Longer duration bonds benefitted as investors absorbed data that showed declining inflation. This also helped corporate bonds and non-investment grade bonds. 

Recession Concerns 

Since early last year, markets have been faced with the potential for a recession in the U.S. To say data and market actions are confusing is putting it mildly. Economic signals are pointing in different directions, and with every new data release there is a new series of headlines, changing the probability of heading into a recession higher or lower than they were before. Some economists are convinced a recession is a foregone conclusion, citing the aggressive nature of rate hikes by the Fed, while others feel efforts by the Federal Reserve are right on track. While there is a lag to when the impact of changes in monetary policy are felt, there is no denying economic activity has slowed, but consumer spending and corporate profits have proven resilient in this challenging environment. Confusing… yes. 

Though history tells us economists are notoriously bad at predicting recessions, it is worth trying to understand what the data is indicating. 

The Consumer 

The most recent reports show that consumer spending is holding up and inflation is coming down. The latest data release for March 2023, showed that inflation has cooled, on a year over year basis, to 5.0%, significantly below the 8.9% in July 2022. The consumer is still spending, and demographics may explain some of this resiliency. Baby boomers account for one fifth of the U.S. population and represent the lion’s share of consumption. Benefiting from economic conditions and timing, they tend to have robust balance sheets, easy access to credit as well as the largest share of asset in the U.S. in the form of excess savings, real estate and equity investments. Reduction in spending patterns appears to be minimal.