The economy started the first quarter of the year with many uncertainties, including inflation concerns, interest rate volatility, the direction of Federal Reserve monetary policy, and banking system worries.
The Fed raised interest rates by 25 basis points after the March 22nd FOMC meeting. Economic numbers such as US employment, Consumer Price Index (CPI), and Personal consumption Expenditure (PCE) price index have come in mixed. The pace of the Fed rate hikes has been one of the fastest in decades as the Federal Funds target rate soared from 0-25% to 4.75-5.00%. The next scheduled FOMC meeting will be May 2-3 and Jun 13-14.
The question remains – what will the central bank do next?
Will the Feb hike by another 25 basis points?
Most important, will the Fed signal an end to the QT process?
Interest rates remain volatile. The 10-year US Treasury yield (TNX) opened the year at 3.88% and ended the quarter at 3.54%. During the first quarter, TNX whipped between 3.295% and 4.091% as investors moved to the safety of money-market funds. A trading range may continue into the second quarter unless an adverse geopolitical or macroeconomic event occurs.
Commodities also fluctuated widely during the quarter. WTI Crude fell sharply on concerns about an impending recession and bank turmoil. However, it rebounded with stocks into the quarter’s end. Gold returned stellar gains for the quarter as investors flocked to the safe-haven asset. Gold ended at 1,977.96 per ounce, nearing the all-time highs of 2,089.20/2,078.80 (8/7/20 and 3/8/22).
US Stocks finished the first quarter of 2023 with positive gains. The ranking of the popular US indexes is as follows:
Nasdaq 100 Index (NDX +21.09% QTD), Nasdaq Composite Index (COMPQ +17.38%), S&P 100 Index (OEX +10.67%), S&P 500 Index (SPX +7.86%), S&P 400 Mid Cap Index (MID +3.30%), S&P 600 Small Cap Index (SML +2.30%), NYSE Composite Index (NYA +2.18%), and Dow Jones Industrial Average (INDU +1.40%).
S&P Technology (XLK +22.59% QTD) and Communication Services (XLC +20.08%) recorded the biggest Q1 2023 gains. The leaderships came from NVDA (+87% QTD), META (+73%), and TSLA (+59%). Due to the banking turmoil, financials and banks performed poorly for the quarter, with FRC (-89%), XION (-38%), and SCHW (-37%) among the worst performers.
In terms of seasonality, April is one of the better months of the year, ranking as the second-best month for the S&P 500 Index (SPX) over the past twenty (20) years, with average gains of 2.0%. Can the favorable seasonality month help to extend the stock market recovery before the onset of the Sell in May and Go Away timeframe?
Will the Fed’s dual mandate of providing for price stability and full employment also include a third mandate to maintain financial stability causing the Fed to pause its rate hiking cycle during the second half of the year?
Until the Fed pivots, it is best to be selective, disciplined, and adhere to risk management and diversification strategies. Rebalancing a portfolio with different investments (i.e., international stocks, income securities, commodities, bonds, etc.) can smooth out the volatility in your portfolio.
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