First Quarter 2023 Market Commentary

U.S. Gross Domestic Product (GDP) rose at an annualized pace of 2.6% in the fourth quarter of 2022, a slower pace than recorded in the third quarter, in which GDP rose 3.2%. GDP results owed mainly to an increase in private inventory investment, consumer, federal government, & state and local government spending, and nonresidential fixed investment, despite seeing decreases in residential fixed investment and exports. The ‘advance’ estimate for the first quarter GDP will be released on April 27. The unemployment rate stayed at 3.5% from the previous quarter, and wages grew at an annual rate of 4.2%.

Consumer confidence improved modestly in March from the previous month, despite increased market volatility resulting from the regional bank failures. However, the level of confidence is below what was generally seen in 2022. Uncertainty around the Fed’s next move on rate hikes rose as multiple regional banks in the U.S. and Credit Suisse overseas broke down. Still, the Fed ultimately decided to raise rates an additional 0.25%. This is the Fed’s ninth consecutive rate hike as it continues its battle to get inflation back down to its long-term target of 2%.

Core CPI, which excludes food and energy prices, rose by 5.6% in the 12 months through March, with a 0.4% increase for the month. Headline CPI, which includes all items, rose by 5% from a year ago, a relatively slower increase than core CPI as energy costs fell and food prices were flat. 

The Bloomberg U.S. Aggregate Bond Index rose 3.0% for the first quarter, as all sectors provided positive returns. Long government/credit bonds and high yield bonds were the leading contributors, up 5.8% and 3.6%. Meanwhile, 3-month T-bills and short government/credit bonds were the laggards, up just 1.2% and 1.8% for the quarter. Bond yields generally fell during the quarter from the previous period, with the yield curve continuing to show a modest inversion in which short-term rates exceed long-term rates. The yield on the 10-year Treasury note, 3.5%, ended the first quarter below the 2-year yield of 4.1%, and the 30-year Treasury bond ended the quarter with a 3.7% yield.

The S&P 500® was up 7.5% for the first quarter, a continuation of solid returns from the previous quarter. Sector returns were mixed across the board as seven of the 11 sectors were positive. Among the leaders were the information technology, communication services, and consumer discretionary sectors, which were up 21.8%, 20.5%, and 16.1%, respectively. Given these strong-performing sectors, growth-style equities significantly outperformed value across the capitalization spectrum. The laggards were the financials, energy, and healthcare sectors, down 5.6%, 4.7%, and 4.3%. The forward P/E for the S&P 500® ended the first quarter at 17.8x, above the 25-year average of 16.8x – a reversal from previous quarters.

Looking internationally, the U.S. outperformed emerging markets (EM) but trailed developed international markets. The MSCI World ex-USA Index, which includes developed countries, was up 8.2%, while the MSCI ACWI ex-USA Index, which includes developed and EM countries, was up 7.0%. (The S&P 500® Index was up 7.5%). EM equities were up 4.0%, led by Asian and Latin American markets, which posted positive returns, while Europe, Middle East & African markets lagged behind. China started 2023 strongly, up 4.7% for the quarter.

Commodities started 2023 as the only negatively performing major asset class, a reversal after vastly outperforming all remaining asset classes in 2022. The Bloomberg Commodity Index declined 5.3% in the first quarter. The energy sub-index of the Bloomberg Commodity Index declined by 19.6%, as natural gas prices fell by 50%. Meanwhile, industrial metals prices declined by 3.2%, and precious metals prices increased by 6.7% for the quarter.

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