Relative Calm for the Stock Market
The stock market has been more calm in 2023 than last year, with the range between the market’s high and low about half what we saw for each quarter of 2022. A “range-bound” market suggests there is disagreement about which direction the market should be heading. Which narrative will prevail?
- The Bull Case: As inflation continues its downward trend, the Fed will be able to pause or even begin lowering interest rates which will help stimulate the economy.
- The Bear Case: If inflation remains high, the Fed will need to raise interest rates further and risk pushing the economy into a recession.
The technology sector has been the market’s best performer through the first quarter of 2023, growing by 21.4%. This recovers half of tech’s losses from 2022. Since the technology sector accounts for about one quarter of the S&P 500, its strong performance helped the S&P 500 grow 7% for Q1.
Large, Sudden Drop in Bond Yields
In contrast to the recent calm of the stock market, the bond market experienced some large, sudden changes. Following the Silicon Valley Bank failure and related worries about potential contagion throughout the financial sector, the yield of a 2-year treasury bond dropped from 5.05% to 3.93% in a single week!1 Since bond yields are inversely related to bond values, this was good news for those who own bonds (although it means slightly lower rates to reinvest in for the future).
Where are Interest Rates Headed?
The market is now anticipating that the Fed will actually reduce rates by 0.42% by the end of the year, whereas just a month ago the market was expecting an increase of 0.51%.2 However, the members of the Fed, when polled, still believe that rates will end the year 0.30% higher.3 Either the Fed or the market will have to flinch in the coming months, so stay tuned.
Calm Before the Storm?
It appears inflation has peaked and is trending downward, and the labor market remains strong.5 This is good news and the market has celebrated seeing some light at the end of the tunnel.
However, inflation is still well above the Fed’s target and it remains to be seen whether the Fed will need to take further action. The relative strength of the economy gives us hope that a potential recession, if one occurs, could be short-lived and not very deep.
It’s prudent to proceed with caution. We will keep following the latest economic data and remain steadfast in our management of market risks, understanding that investors are rewarded in the long-run for staying in the market.
Sources & Disclosures
Data about the S&P 500 Index and Morningstar US Technology Index used from Kwanti.com
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