First Quarter 2023 Update
May 1, 2023
- The FOMC, in its ongoing effort to aggressively battle stubbornly high inflation, raised its federal funds rate target range by 0.25% in the quarter, to 4.50% to 4.75%, from a range of 4.25% to 4.50%.
- Stock investors seem to have mostly discounted negative news, and are anticipating an end to the FOMC’s aggressive interest rate policy and an economy that lands softly rather than succumbs to recession.
- Investors will be paying close attention to the debt-ceiling discussions over the next several weeks, and will also begin to turn their attention to the political landscape, as presidential candidates throw their hat in the ring, and as anticipation grows for the first debates later in the summer.
1st QUARTER 2023 MARKET COMMENTARY
Below, we’ve highlighted 2023 broad market returns for the first quarter and year-to-date time periods:
|MSCI Emerging Markets
|S&P Real Assets Equity
|Barclays Muni 5 Year
THE GLOBAL ECONOMY
The US economy picked up steam in the second half of 2022, but this follows the declines from the first two quarters of the year. As a result, the economy continues to struggle with rising interest rates initiated by the Federal Open Market Committee (FOMC) to combat decades-high inflation. Against this backdrop, the Bureau of Economic Analysis released the third estimate of the fourth quarter 2022 real GDP, a seasonally adjusted annualized rise of 2.6%, slightly lower than the prior estimate, and a decline from the 3.2% increase in the prior quarter. The employment situation continued to exceed expectations in the quarter, as the labor market remained extremely tight. The February report showed that employers added 311,000 jobs in the month, and that the unemployment rate was a tad higher at 3.6%. The FOMC, in its ongoing effort to aggressively battle stubbornly high inflation, raised its federal funds rate target range by 0.25% in the quarter, to 4.50% to 4.75%, from a range of 4.25% to 4.50%. The FOMC has raised the fed funds target rate range a total of eight times since March 2022.
Stock prices were mixed in the quarter following the recovery in the fourth quarter of 2022. There was a significant amount of dispersion in returns, with some equity sectors gaining almost 22%, while others declined by more than 4%. Many of the obstacles for corporate earnings remain in place, including persistently high inflation, the rise in interest rates, and an economy that some analysts believe will eventually encounter a recession in 2023. Stock investors seem to have discounted the negative news, and are anticipating an end to the FOMC’s aggressive interest rate policy and an economy that lands softly rather than succumbs to recession. When the quarter ended, the S&P 500 Index had advanced 7.5%, the MSCI EAFE Index of developed markets stocks was higher by 8.5%, and the MSCI Emerging Markets Index rose by 4.0%.
Fixed income securities’ prices were, on balance, higher (and yields lower) during the quarter, as investors anticipated the worst of the FOMC tightening may be behind us. The FOMC was not quite as aggressive during the recent quarter as it had been over the prior three quarters, raising the fed funds target only once, by 25 basis points. Despite the FOMC’s aggressive rate increases over the past year, inflation remains stubbornly high. The committee indicated that the fed funds rate is nearing its terminal target, but analysts warn that conditions can change very quickly, forcing the FOMC to continue to raise rates. The consensus among the committee is that the fed funds rate is expected to end 2023 at 5.1%.
The global economy continued to recover during the quarter following a shaky first half of 2022. Inflation remains persistently and painfully high, but the rate of inflation has eased a bit since the FOMC instituted the most aggressive program of interest rate increases in 40 years. The employment situation remains strong, with employers confounding analyst expectations of hiring. Such strong job gains can often lead to wage inflation pressures, but those have not yet been manifested in the data, giving economists some hope that a recession can be averted in 2023. In addition, FOMC policymakers expect that the fed funds rate will not need to be raised much more, as they estimate the rate will end 2023 at 5.1%. The banking crisis that was sparked by depositors withdrawing funds from Silicon Valley Bank (SVB) seems to have been contained without additional further negative repercussions, perhaps due to the idiosyncratic nature of SVB’s business. Investors will be paying close attention to the debt-ceiling discussions over the next several weeks, and will also begin to turn their attention to the political landscape, as presidential candidates throw their hat in the ring, and as anticipation grows for the first debates later in the summer. Geopolitical issues are sure to grab the attention of investors as well, as relations between Russia and China (as well as Russia and Iran) warm, and those between the US and almost everyone else cools. In the end, analysts will be focused on fundamentals, and particularly expectations thereof. Stock prices are driven by earnings, and despite the negative reports across multiple fronts over the past couple of years, it seems quite possible that stock prices may have discounted the bad news.
Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.
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