Hello all - we hope you had a nice March.
It was a very volatile month for the markets, though they ultimately posted decent gains. For March, the Dow gained 1.9%, the S&P 500 rose 3.7%, and the Nasdaq, which has a higher concentration of tech stocks, added 4.9%.
We also ended the first quarter of 2023, with the markets having a wide divergence in how they performed. Over the first quarter, the Dow rose 0.4%, the S&P 500 gained 7%, and the Nasdaq was higher by 17%. That gap between the Nasdaq and Dow was the widest in over 20 years.
It was a very volatile month for the markets, though they ultimately posted decent gains. For March, the Dow gained 1.9%, the S&P 500 rose 3.7%, and the Nasdaq, which has a higher concentration of tech stocks, added 4.9%.
We also ended the first quarter of 2023, with the markets having a wide divergence in how they performed. Over the first quarter, the Dow rose 0.4%, the S&P 500 gained 7%, and the Nasdaq was higher by 17%. That gap between the Nasdaq and Dow was the widest in over 20 years.
Here’s a look at how the markets moved this month:
And here’s the sector performance for the month:
Amid all the volatility, investors flocked to the safety of bonds as the sector saw solid gains in prices.
When bond prices rise, their yields fall. This month, bonds with a shorter maturity saw their yields drop by the largest amount in decades. Unfortunately, other drops of that size were during massive crises in our economy.
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BANKING CRISIS
By now you’ve heard about the banking failures earlier this month, so we won’t go into the how’s and why’s of what happened. Its impact of on market was tremendous, however. In the early part of the month, we saw daily headlines like this:
By now you’ve heard about the banking failures earlier this month, so we won’t go into the how’s and why’s of what happened. Its impact of on market was tremendous, however. In the early part of the month, we saw daily headlines like this:
As the month progressed, numerous bailout packages, buyouts, and government assistance and pledges helped put out the fire. Investors now believe the worst is behind us – at least in the near term – and stocks rose as a result.
By the end of the month, the headlines looked like this:
By the end of the month, the headlines looked like this:
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THE FED
There is a saying that the Federal Reserve raises interest rates until something breaks. They’ve raised rates at a record pace and this month, something finally broke.
Here’s a look at the history of Fed hikes, the resulting busts, and subsequent reversal on rates:
This chart goes back even further:
As you can see from the charts, sudden increases in rates always results in something breaking.
The bank failures actually had investors optimistic that the Fed would be done raising interest rates (lower rates helped fuel the market rise over the last decade).
Unfortunately, the Fed announced another rate hike this month. While they’re continuing to raise rates at a historically fast pace, they seemed to indicate that the pace of rate hikes would slow down in the future. Investors liked that and stocks moved higher as a result.
The bank failures actually had investors optimistic that the Fed would be done raising interest rates (lower rates helped fuel the market rise over the last decade).
Unfortunately, the Fed announced another rate hike this month. While they’re continuing to raise rates at a historically fast pace, they seemed to indicate that the pace of rate hikes would slow down in the future. Investors liked that and stocks moved higher as a result.
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ECONOMY
It’s not just the banking sector investors are worried about, but the overall economy in general. There are many red flags that have investors concerned a recession is right around the corner.
A very reliable indicator is the yield curve. We’ve discussed this one before and it can be a little wonky. We won’t go into details about what the yield curve is, but it is basically the relationship between bonds of different maturities.
The relationship between the 10-year and 2-year bond is the most common way to look at the yield curve. When this relationship is negative, a recession always follows. More specifically, when the relationship is negative and quickly becomes positive, a recession is near.
The chart below shows this. A recession is marked by the blue bars and you can see, as the line goes below zero and quickly moves higher, a recession occurs.
This month we saw the negative relationship quickly reverse and the line move higher. Does that mean a recession is near?
We aren’t so sure that a recession is imminent.
Instead of looking at 10-year and 2-year bonds, another reliable indicator is 10-year and 3-month bonds. In the chart below, you can see it follows the same pattern as the 10s/2s, going negative and rising before a recession. However, right now this indicator doesn’t have the quick rising line.
Instead of looking at 10-year and 2-year bonds, another reliable indicator is 10-year and 3-month bonds. In the chart below, you can see it follows the same pattern as the 10s/2s, going negative and rising before a recession. However, right now this indicator doesn’t have the quick rising line.
We do believe a recession is likely soon, but it may not be as soon as some think.
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INFLATION
The Fed wants inflation to come down and they closely watch the inflation reports each month. That means investors closely watch them, too.
We’ll start with a look at inflation from an annual perspective. As you can see, inflation looks like its trending lower.
The Fed wants inflation to come down and they closely watch the inflation reports each month. That means investors closely watch them, too.
We’ll start with a look at inflation from an annual perspective. As you can see, inflation looks like its trending lower.
However, when you look at inflation month-by-month, inflation is clearly not slowing down.
The “core” measurement, which excludes food and energy, continues to see solid monthly increase in inflation.
Inflation at the business level, or PPI, looks like it might be stabilizing.
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OTHER ECONOMIC REPORTS
We continue to see signs the economy is slowing, although there were a couple bright spots this month.
First is an interesting look at the job situation at companies. Last year they were mentioning they didn’t have enough people to hire, but this year they are announcing more job cuts.
Another indicator we’ve been discussing recently is the leading economic indicator index. It combines many other indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).
This index has been lower for 11-straight months. That has happened only three other times, and each of these were in recessions.
This index has been lower for 11-straight months. That has happened only three other times, and each of these were in recessions.
The manufacturing part of our economy stands firmly in a contraction, but ticked slightly higher while the service part of our economy had a slight move lower.
Retail sales fell after a surprising gain the previous month.
Durable goods (these are items with a longer life, like a phone or refrigerator) saw another decline.
Consumer confidence may be starting to trend higher.
Confidence at small businesses saw a slight tick higher from last month.
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Where does the market go from here?
Stocks may be a little on the expensive side in the short term, so we wouldn’t be looking to put new money in here. This time of the year works in investors’ favor, however, as it tends to be a strong period for the markets.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
