Stock and bond markets ended the first quarter of 2023 with solid gains, even though investors remained concerned about inflation, continued interest rate hikes by the Federal reserve, whether Congress will vote to increase the debt ceiling and worsening relations with China.
An important new concern was bank failures. Two large banks failed and two others came close.
Currently, this has happened to only a small number of banks. It does not appear to be a systemic problem. The relatively unforeseen nature of the banking scare is just another example of why it is not possible to predict market returns.
Gains in the stock and bond markets were primarily driven by a continued decline in interest rates, the rate of inflation and surprisingly resilient economic data (including continued low unemployment and better than expected corporate earnings). Those trends increased investors’ hopes that the Fed could deliver an economic soft landing (soft landing means the economy slows but avoids a recession).
Note that declines in the rate of inflation are often misunderstood. A “decline in inflation” means that prices are not increasing as rapidly as before; it does not mean that prices are declining. With most goods and services, price increases are permanent.
Different stock indexes posted significantly different returns during the quarter.
Foreign developed markets outperformed the S&P 500 through the first three months of the year as economic data in Europe was better than expected and European banks were viewed as mostly insulated from the U.S. regional bank crisis. Emerging markets underperformed developed markets because of still-elevated geopolitical stress, as U.S.-China tensions rose following the Chinese spy balloon affair. Note that China is still considered an emerging market.
Bond investors finally saw positive returns.
This remains a tumultuous time in the stock and bond markets. Investors are facing the highest interest rates in decades, the worst geopolitical tensions in years, and a very uncertain economic outlook that deteriorated in the wake of recent bank failures.
Yet despite all this uncertainty, most sectors of the stock and bond markets did well over the past six months after hitting lows in October 2022. The real long-term drivers of market performance -- steady economic growth, the labor market and U.S. corporate earnings -- proved resilient during the first quarter.
At Arthur Stein Financial, we realize there are many risks facing both the markets and the economy and are committed to helping clients navigate the always challenging investment environment. We believe it is critical to stay invested, remain patient, and stick to your plan. Part of that plan should be an appropriate allocation target based on your financial position, risk tolerance, and investment timeline.
Please do not hesitate to contact us with any questions or comments or to schedule a portfolio review.
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Arthur Stein and Arthur Stein Financial, LLC are not authorized to give legal or tax advice. For information on your specific situation, please consult your tax advisor regarding any tax implications and your attorney for legal implications. As required by the US Treasury Regulations, you should be aware that this presentation is not intended to be used and it cannot be used for the purposes of avoiding penalties under federal tax laws.
Keep in mind that:
Past performance is no guarantee of future performance;
Investments involve the risk of loss of principal and earnings;
ETFs, mutual funds, money market funds, etc. are not guaranteed by the US Government, the FDIC, a bank or anyone else.
“Average annual return” evens out variations in the actual year-to-year returns.
ETFs, mutual funds and individual stocks and bonds fluctuate in value and there will always be times when they lose value.
None of the information provided is necessarily relevant to anyone’s personal situation. Circumstances differ among individuals and you should not assume that these generalizations or information apply to you.
Investments mentioned may not be suitable for all investors.