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1st Quarter 2023 Market Udate

If not careful, we can easily slide into day-to-day thinking rather than our long-term goals and dreams. Suffering can become the order of the day as we watch the ups and downs of the S&P, the DOW, the NASDAQ, the Dollar, Gold, Silver, Oil and Gas – to name just a few. What to do? Rather than succumbing to fright and flight and tossing your investment beliefs out the window, take a deep breath and recall that we have been here before, many times. We get it – this has not been easy but when you know what to expect from your portfolio in terms of long-run returns and short-run risks, this gets easier.

Who would have thunk it but in addition to the impact of rising inflation, two major banks collapsed in March, sending bank stocks lower.

The year 2022 may best be described by one word: inflation. The economies of the United States and the world were influenced by rising inflation, its causes, and the policies aimed at curtailing it. While inflationary pressures began to mount in 2021, they were exacerbated by continuing supply shortages, the ongoing effects of the COVID-19 pandemic, both here and abroad, the Russian invasion of Ukraine, and a global energy crisis. On a positive note, we did see some promising sigs in Q4 of inflation declining and growth potentially picking up.

Let’s talk about what’s going on right now. Wall Street proved resilient during the first quarter of the year, despite rising inflation, uncertainty about the Federal Reserve's actions, interest-rate hikes, and banking concerns. Good news, however, inflationary data in January seemed to show inflation may have peaked, and that the Fed would scale back its interest-rate hikes, if not cut them. But then subsequent inflation data showed prices ramped up again. Predictably, stocks and bond prices dipped as investors responded to concerns that interest rates would continue to rise and for a longer period.

Who would have thunk it but in addition to the impact of rising inflation, two major banks collapsed in March, sending bank stocks lower. Credit Suisse Group, nearing failure, was taken over by rival UBS Group, while several U.S. banks provided funds to keep First Republic Bank afloat. A bright spot, the economic recession that has been predicted has yet to come to fruition.

Not to dis any entity, let’s keep in mind that all the media pundits want to keep us glued to their network so, to remain sane, we must take all with a grain of salt. The labor market remained strong, and while inflation continued to rise, the two primary indicators, the Consumer Price Index and the Personal Consumption Expenditures Price Index, showed prices slowed on an annual basis.

Despite all this clear turmoil, coupled with the ongoing war in Ukraine, stocks regained their footing and ended the quarter on the plus side. The tech-heavy Nasdaq led the benchmark indexes, followed by the S&P 500, the Global Dow, the Russell 2000, and the Dow.

Investors poured money back into Mega cap Tech shares, driving them higher during the first quarter of 2023 after an underperforming 2022. Those gains helped drive the Nasdaq and the S&P 500 higher. Even with investors taking some gains from the Mega caps, other market sectors reaped the benefits. Energy stocks, which excelled in 2022, fell in the first quarter of 2023, as did crude oil prices. The dollar dipped lower, while gold prices rose higher.

The quarter kicked off with stocks enjoying their best January performance since 2019, as inflation data suggested that inflation may have peaked, raising hopes that the Federal Reserve would scale back interest-rate hikes and temper fears of an economic recession. Nevertheless, Federal Reserve Chair Jerome Powell cautioned that the battle against rising inflation was far from over and additional rate hikes were upcoming. In fact, the Federal Reserve hiked interest rates 25 basis points on the last day of the month.

Growth stocks performed best, with Mega caps making solid gains. Consumer discretionary, communication, and tech sectors performed well, while defensive sectors, such as utilities, health care, and consumer staples, dipped lower.

Bond prices advanced, pulling yields lower. While 260,000 new jobs were added in December, the growth was the slowest in two years. Nevertheless, each of the benchmark indexes listed here added value, led by the Nasdaq (10.7%), followed by the Russell 2000 (9.7%), the Global Dow (7.8%), the S&P 500 (6.2%), and the Dow (2.8%). Gold prices advanced 6.3%.

True to form these days, stocks gave up some of their January gains in February, with each of the benchmark indexes losing value. The Dow fell the furthest at -4.2% followed by the Global Dow -2.7%, the S&P 500 -2.6%, and the Nasdaq down 1.1%. Bond prices declined, driving yields higher, with 10-year Treasury yields advancing 39 basis points. Crude oil prices decreased 2.8% to $76.86 per barrel. The dollar rose 2.8% against a basket of currencies.

Keeping us on our toes, March was a very choppy month for market returns. Despite a clear banking crisis, investors stayed the course, driving stocks mostly higher. The Nasdaq and the S&P 500 led the gainers of the benchmark indexes listed here. Several sectors outperformed, including information technology, communication services, and utilities, while financials fell notably on the heels of the bank failures.

Here’s what it looked like at the end of Quarter 1:

Market Statistics

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be
used to benchmark performance of specific investments.

Latest Economic Reports

Employment: Job growth remained strong in February with the addition of 311,000 new jobs, compared with an average monthly gain of 343,000 over the prior six months. Despite federal interest-rate hikes aimed at slowing the economy and inflation, there is little evidence that the supply of labor is peaking.

There were 191,000 initial claims for unemployment insurance for the week ended March 25, 2023. The total number of workers receiving unemployment insurance was 1,689,000. By comparison, over the same period last year, there were 171,000 initial claims for unemployment insurance, and the total number of claims paid was 1,506,000.

FOMC/interest rates: The Federal Open Market Committee met March 21-22; at which time the Committee increased the Federal Funds target rate range by 25 basis points to 4.75%-5.00%. The statement from the FOMC indicated that it is "strongly committed to returning inflation to its 2.0% objective." The Committee also noted that it would consider adjusting its policy stance based on "labor market conditions, inflation pressures and inflation expectations, and financial and international developments."

GDP/Budget: Despite rising interest rates and accelerating inflation, the U.S. economy advanced in the fourth quarter of 2022. The economy, as measured by gross domestic product, accelerated at an annual rate of 2.6% in the fourth quarter of 2022, according to the third and final estimate from the Bureau of Economic Analysis. 6.3%, Overall, In GDP increased 2.1% in 2022, compared with an increase of 5.9% in 2021.

Inflation/consumer spending: Inflationary pressures continued to mount in February. According to the latest Personal Income and Outlays report, the Personal Consumption Expenditures Price Index increased 0.3% in February and 5.0% since February 2022.

Housing: Sales of existing homes increased for the first time in thirteen months after vaulting 14.5% in February. Despite the increase, existing-home sales dropped 22.6% from February 2022. According to the report from the National Association of Realtors®, home buyers took advantage of any interest rate declines, while some areas of the country saw gains where home prices declined.

The median existing-home price was $363,000 in February, higher than the January price of $361,200 but slightly lower than the February 2022 price of $363,700. Unsold inventory of existing homes represents a 2.6-month supply at the current sales pace, marginally lower than the January supply of 2.9 months.

Sales of existing single-family homes rose 15.3% in February but were down 21.4% from February 2022. The median existing single-family home price was $367,500 in February, up from $365,400 in January but lower than the February 2022 price of $370,000.

The inventory of new single-family homes for sale in February represented a supply of 8.2 months at the current sales pace, down marginally from the January estimate of 8.3 months.

These numbers represent an average – and may be indicative of much of central America, but for those of us living on the West or East coasts, the averages aren’t all that meaningful.

Manufacturing: Industrial production was unchanged in February, following a 0.3% increase in January and a 1.4% drop in December. Manufacturing increased 0.1% in February (1.3% in January) but was 1.0% below its year-earlier level. Mining decreased 0.6%. Utilities, on the other hand, rose 0.5% over the 12 months ended in February, total industrial production was 0.2% below its year-earlier level.

International markets: The battle against rising inflation remained at the forefront for most of the world's economies. Core inflation (excluding food and energy prices) hit a record high in the eurozone for March. The European Central Bank hiked interest rates 50 basis points and will likely call for a similar rate increase in May. The Bank of England added a quarter of a percent to its target interest rate after inflation in February, a 10.4% annual increase, which exceeded the bank's expectations.

Consumer confidence: The Conference Board Consumer Confidence Index® increased in March to 104.2, up from 103.4 in February. The Present Situation Index, based on consumers' assessment of current business and labor market conditions, decreased to 151.1 in March, down from 153.0 in the previous month. The Expectations Index — based on consumers' short-term outlook for income, business, and labor market conditions — ticked up to 73.0 in March from 70.4 in February.

Eye on the Quarter Ahead

We think the second quarter is likely to see interest rates continue to be pushed higher by the Federal Reserve. However, with any luck the rate hikes may be smaller, with the possibility of a reduction in the number of increases. The labor sector should remain solid, though job gains may wane a bit. Although industrial production may show some gains, the services sector is more likely to strengthen. That would be good.

So here we are – and, again, we have been here before. Truth be told, the markets cycle. No one has a crystal ball, particularly when stocks are jumping around like an enchanted pogo stick. One of the worst decisions investors make in an unstable market result from keeping too close an eye on their portfolio. If we remain focused on the long term and keep our wits about us, we will survive and live to see a better day. We always have.

We are here for you – and always will be. We’re in this together so don’t hesitate to call. No question or concern is too small.