Market & Economic Commentary: Q1 2023

Quarter in Review

During the first quarter of 2023, markets successfully navigated a highly uncertain environment, from

dramatic swings in economic data to the sudden onset of a banking crisis. Despite the turmoil, markets

managed to rebound. The S&P 500 finished the quarter with a gain of 7.5%, the DJIA finished up 2.1%,

and the tech‐heavy Nasdaq posted a healthy increase of 17.1%.¹

Bonds, which had a historically bad year in 2022 as interest rates spiked, rebounded over the first quarter

in a flight to quality and an expectation that rate increases were nearing an end. This was particularly true

for shorter‐term US Treasuries as the two‐year notes posted the best monthly return since 2002, up a

strong 1.7% in March. In addition, the Bloomberg US Aggregate Bond Index and the Global Aggregate

Index, representing bonds from developed and emerging markets, ended up 3% for the quarter.²

Inflation, Banks, and Tech Stocks Drove Markets

At the end of 2022, investors hoped that price pressures were on a steady path downward, with a soft

landing in sight. Then came a slew of economic data in February that showed more robust growth. In the

case of “What is Good Is Bad,” this heralded a possible second wave of inflation, and markets promptly

sold off on heightened fears that central banks in both the US and Europe might have to push interest

rates higher and possibly keep them there longer.

The higher‐than‐expected January inflation reading and strong economic data, including a robust jobs

report, buoyant retail sales, and rising US producer prices, served as a poignant reminder that the crowd

often gets ahead of the data. Indeed, it often takes over a year for rate increases to impact the broader

economy, and the unique causes of the current inflationary period, such as the aftereffects of the

pandemic, have made predictions more guesswork than usual. Specifically, the inherent strengths in the

US job market and among consumers mean the markets have repeatedly had to adjust expectations about

when rate increases might end.

The banking turmoil complicated inflation expectations in March and briefly jolted niche segments of the

economy. Caused by mismatches between short‐term liabilities and long‐term assets exposed by rising

interest rates, the bank failures demonstrated the unintended risks of the rapidly rising interest rates. The

rapid‐fire collapse of a few medium‐sized banks roiled the crypto and venture capital sectors and had the

potential to destabilize the financial system until federal regulators stepped in to allow FDIC to backstop

all deposits. Concerns linger that some sectors, such as commercial real estate, may prove destabilizing

for certain banks. However, while there continue to be some reverberations across the banking sector,

steps taken by regulators have calmed markets, and recent strong earnings reports from large US banks

indicate that the broader banking system remains strong.

As markets emerged from interest rate uncertainty and concerns about the banking infrastructure,

investors grew a bit more positive toward quarter‐end. However, the enthusiasm has been limited to a

handful of large‐cap technology companies, as you can see from the chart below. For instance, the ten

largest stocks in the S&P 500 have been responsible for 90% of the overall return through the end of the

first quarter, and the 2023 rally remains anchored by the biggest stocks at the top of the market. Such

concentration in a few names can lend itself to potential drawdowns and bouts of volatility, especially if

the recent aggressive interest increases or reduced bank lending lead to a near‐term recession.³

Source: Charles Schwab, Bloomberg, as of 3/31/2023

Nevertheless, company and consumer balance sheets remain generally strong while the year of interest

rate increases does finally seem to be moderating economic growth and dampening inflationary pressure.

A near‐term recession would likely prove shallow, and as markets look ahead, a continued, broader

recovery remains quite possible.

Final Thoughts

In our complex, globalized world, few quarters escape dramatic headlines, and volatility is inherent in

investing. Markets are continually adjusting to risk and then again to expected recovery.

As we continually advise, investors should stay patient through the inevitable volatility. Long‐term

investors have historically been rewarded for patiently bearing uncertainty. Indeed, half of the S&P 500’s

best days in the past 20 years have occurred during particularly volatile markets. Miss just a few of those,

and the negative impact on long‐term returns can be significant; keep in mind that the best ten days over

the past 20 years accounted for over 75% of the overall return for the period.⁴

As always, we will continue to monitor the impact of current events on markets for you, keep you

apprised, and support you for the long haul.

Sources:

¹ Morningstar Direct, as of Mar 31, 2023

² Morningstar Direct, as of Mar 31, 2023

³ Source: Charles Schwab, Bloomberg, as of Mar 31, 2023.

⁴ Source: J.P. Morgan Asset Management analysis using data from Bloomberg. Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization‐weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Indices do not include fees or operating expenses and are not available for actual investment. Data as of December 31, 2021.

Disclosures and Definitions

Investors cannot invest directly in an index. Indexes have no fees. Historical performance results for investment indexes do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the occurrence of which would have the effect of decreasing historical performance results. Actual performance for client accounts will differ from index performance.

S&P 500 Index represents the 500 leading U.S. companies, approximately 80% of the total U.S. market capitalization.

Dow Jones Industrial Average (DJIA) Is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ.

The Nasdaq Composite Index (NASDAQ) measures all Nasdaq domestic and international based common type stocks listed on The Nasdaq Stock Marketand includes over 2,500 companies.
MSCI World Ex USA GR USD Index captures large and mid-cap representation across 22 of 23 developed markets countries, excluding the US. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets (as defined by MSCI).  The index consists of the 25 emerging market country indexes.
Bloomberg Barclays US Aggregate Bond Index measures the performance of the U.S. investment grade bond market. The index invests in a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States – including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year.

Bloomberg Barclays Global Aggregate (USD Hedged) Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging market issuers. Index is USD hedged.

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