Quarterly Market Insights | Q1 2023

Quarterly Market Insights | Q1 2023

U.S. Markets

Stocks posted solid gains in the first quarter as investors navigated corporate earnings, shifting monetary signals, and troubles in the banking sector.

For the three months ending March 31, the Dow Jones Industrial Average rose 0.38 percent while the Standard & Poor’s 500 Index gained 7.03 percent.

The Nasdaq Composite led, picking up 16.77 percent.1

A January Rally

Stocks rallied in January, propelled by cooling inflation, a better-than-expected start to earnings season, and healthy economic data.

Where investor sentiment had been weighed down by concerns over interest rates, a new, more upbeat mood surfaced.

Stocks rallied in January, propelled by cooling inflation, a better-than-expected start to earnings season, and healthy economic data.

Where investor sentiment had been weighed down by concerns over interest rates, a new, more upbeat mood surfaced.

Stocks Stumble in February

However, strong economic data released over the course of February diminished investor hopes of a pause in rate hikes, which dragged stocks lower.

Fourth quarter earnings were a bit underwhelming, though they generally met the market’s low expectations.

While 68 percent of the companies comprising the S&P 500 exceeded Wall Street’s earnings estimates, this was below the five-year average of 77 percent.

Moreover, despite the number of positive earnings surprises, earnings declined for the first time since 3Q 2020, falling by 4.9 percent.2

March Twists & Turns

Stocks entered March holding onto modest year-to-date gains, but the final month of the first quarter would prove to be its most dramatic.

Interest rate fears flared up once again, ignited by congressional testimony by Powell, who suggested that rates may need to be hiked higher and faster than the Fed had anticipated.3

Banking Sector

Selling pressure accelerated after regulators took over two U.S. banks. Fears then rose that the banking sector issues were widening after a Swiss bank was taken over by a competitor.

The difficulties within the banking system also changed market sentiment regarding future rate hikes.

While the Fed raised rates 25 basis points in March, Powell hinted that the end of the rate-hike cycle was nearing.

Stocks steadied as banking fears eased, notching gains at the close of the month and leaving stocks higher for the quarter.

Quarterly Sector Scorecard

For the quarter, big gains were posted in Communications Services (+20.80 percent), Consumer Discretionary (+15.78 percent), and Technology (+21.35 percent), while Industrials (+3.02 percent), Materials (+3.84 percent), Real Estate (+1.22 percent), and Consumer Staples (+0.21 percent) saw modest increases. Energy (-5.30 percent), Financials (-5.99 percent), Health Care (-4.70 percent), and Utilities (-3.99 percent) all experienced losses.4

What Investors May Be Talking About in April

In April, companies will start reporting first quarter earnings, but actual financial results may be of only secondary importance.

The market’s earnings expectations are actually quite low as Wall Street analysts’ earnings estimates have come down by 5.7 percent between the end of December and February.

While first quarter estimates tend to be lowered, the average cut in earnings estimates over the past five years was a much more modest 2.3 percent.5

Markets may be more interested to hear what corporate leaders have to say about the future, particularly in light of a more uncertain economic landscape created by recent banking issues.

One potential concern is whether a tighter lending environment will emerge as banks look to manage risk.

Fed Chair Powell referred to this possibility in his post-Federal Open Market Committee meeting press conference when he suggested that financial conditions may have tightened more than traditional signs are reflecting.6

Over the last three quarters, the number of S&P 500 companies citing “recession” on their earnings calls fell from 241 to 148.

Investors may look to see whether these diminishing concerns over recession reverse in the weeks ahead.7

World Markets

Investor optimism grew overseas as well, as Europe emerged from winter in far better shape than feared, and China continued its reopening progress.

For the quarter, the MSCI-EAFE Index jumped 7.65 percent.8

European markets were up strongly for the three-month period. Italy picked up 14.37 percent, France tacked on 13.11 percent, and Germany added 12.25 percent.

However, the U.K. lagged, gaining just 2.42 percent for the quarter.9

Returns were much more subdued in Pacific Rim markets, with Hong Kong adding 3.13 percent, and Australia rising 1.98 percent. Japan was among the better performers, gaining 7.46 percent.10

The Fed

The Fed implemented two rate hikes of 0.25 percent, one each in February and March, in its year-long effort to combat inflation.20

The March increase came after regulators took control of two regional banks, which raised some fears about the banking sector.20

The official announcement accompanying March’s rate hike decision hinted that the Fed soon may be done raising rates.

The statement also reiterated the Fed’s belief in the banking system’s soundness, while acknowledging that it was too early to determine how banking issues may impact the economy.20

Fed Chair Powell, in his post-meeting press conference, said that consideration had been given to not hiking rates, but that the Federal Open Market Committee believed that elevated inflation and solid economic activity were reasons to raise rates despite concerns about the banking sector.20

Our blog posts are intended for information purposes only and should not be interpreted as financial advice.

You should always engage the services of a fully qualified financial planner before entering any financial contract.

To discuss engaging the services of Fortitude Financial Planning please email us at info@fortitudefp.ie.

Fortitude Financial Planning Ltd will not be held responsible for any actions taken as a result of reading these blog posts.

1. WSJ.com, March 31, 2023
2. FactSet.com, March 2, 2023
3. Reuters.com, March 7, 2023
4. SectorSPDR.com, March 31, 2023
5. FactSet.com, March 3, 2023
6. CNBC.com, March 22, 2023
7. FactSet.com, March 10, 2023
8. MSCI.com, March 31, 2023
9. MSCI.com, March 31, 2023
10. MSCI.com, March 31, 2023
11. BEA.gov, March 30, 2023
12. CNBC.com, March 10, 2023
13. CNBC.com, March 15, 2023
14. Morningstar.com, March 17, 2023
15. Finance.Yahoo.com, March 16, 2023
16. CNBC.com, March 21, 2023
17. CNN.com, March 23, 2023
18. CNBC.com, March 14, 2023
19. Census.gov, March 24, 2023
20. WSJ.com, March 22, 2023
21. Yahoo.com, March 31, 2023
22. Census.gov, March 15, 2023
23. MetLife.com, 2023
24. Deloitte.com, 2023
25. CDC.gov, March 31, 2023
26. Realtor.com, March 2023
27. CNN.com, March 3, 2023
28. Workweek.com, March 1, 2023
29. News.Gallup.com, February 3, 2022
30. NCEI.noaa.gov, 2023

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