EQM Indexes 1Q 2023 Market Review
The first quarter of 2023 ended up being a rollercoaster ride for investors, ultimately ending on a bullish note, with the S&P 500 TR Index up 7.50% for the quarter and the tech-stock heavy NASDAQ Composite recovering with a gain of 17.05%.
Markets started off the year with a bang, on expectations that the end of the Fed tightening cycle was near, with signs that inflation was finally getting under control. But the market lost momentum in February, with all three major indexes finishing lower, after stronger-than-expected inflation and jobs news, with the Fed doubling-down on its commitment to curb inflation.
But then came the ides of March, bringing with it a bank crisis, as three U.S. banks: Silvergate; Signature; and Silicon Valley Bank; all failed within days of each other. The financial crisis then spread to Europe, with Credit Suisse needing to be bailed out by UBS. The bad news for banks, caused by the Fed’s unprecedented rate hikes, ended up being good news for stocks and bonds.
Even in the midst of a banking crisis, the Fed ended up raising interest rates for the ninth time on March 22nd, hiking by another 25 bps. But the Fed’s tone has become decidedly more conciliatory in light of the banking crisis it helped create. Investors seem convinced that the end of tightening is near, and in fact the CME Fed Watch tool, now predicts a 92% probability of a rate cut by the end of the year.
Tech stocks lead the way in the first quarter, especially liquid, mega cap tech names with strong cash positions. The top-performing tech name for the quarter was chipmaker Nvidia (NVDA), up a whopping 90% in Q1, and the biggest winner in the S&P 500 Index. Artificial Intelligence (AI) buzz and better-than-expected results and strong guidance was behind the gain.
Another technology name, Meta Platforms (META), Facebook’s parent company, finished in second place among S&P 500 names, climbing 76%. Meta was just one of many tech companies to announce job cuts and layoffs during the quarter. And investors seem to like the idea of aligning expenses with slower revenue growth. Here is the running list of tech industry layoffs as compiled by TechCrunch. There were 84,714 employees laid off in January, 36,491 employees laid off in February, and 37,109 employees laid off in March.
So even as markets are rising and bond yields subsiding, is an economic recession still on the horizon? Given all the previous tightening and the fragility of the banking system, is a recession almost a certainty? And will it be a “soft landing” or a “hard landing”. While the odds of an economic slowdown over the next year seems fairly high, especially in light of tighter credit conditions caused by the banking crisis, the final arbiter of the label is the National Bureau of Economic Research.
On the one hand, the U.S. economy looks fairly strong. The unemployment rate in March was just 3.5%, even though job growth slowed. Even the Fed does not seem confident in predicting a recession. The latest (4/5) real-time GDP estimate produced by the Federal Reserve Bank of Atlanta Economy Now app, shows the economy growing in the first three months of the year at an annualized rate of about 1.5 percent. That’s not bad really, considering all the headwinds it has endured. BTW, if you don’t have the app, I highly recommend downloading it using the link provided above.
The yield curve has been inverted the last 190 days, with the 10-2 year spread ending the quarter at -0.58%. That means, short-term interest rates continue to be lower than long-to-medium term rates. Campbell Harvey, professor of finance at Duke University, conducted the original research on how an inverted yield curve is a strong predictor of a recession. He says that the economy is nearing multiple quarters of inversion and flashing “code red”, warning the Fed to pause on raising interest rates. He thinks, it is not too late to dodge a recession, but the Fed needs to pivot now.
What can investors learn for the ups and downs experienced by the markets in the first quarter? In times of turmoil, like the recent banking crisis, there is a flight to quality and liquidity. In this case, the flight was to big tech names, likely to benefit from a lower interest rate environment and better cash position in a credit crunch. Investors also learned how easy it is to get “whipsawed” when market conditions turn on a dime. It was a solemn reminder that the best approach to investing, is still one focused on long-term goals and diversification.