Market Review - Quarter 1, 2023
Source: FactSet
Markets ended a volatile but positive first quarter, with gains in technology offsetting weakness in banks. The quarter also saw a reversal in many of 2022’s underperformers.
Developed international equities (MSCI EAFE) across Europe and Japan rose 8.6% and outperformed the US and emerging markets. The outperformance came as investors were surprised by better-than-expected economic growth, corporate earnings, as well as cheaper relative valuations. US equities (S&P 500) rose 7.5% despite the banking turmoil, given its larger weight in technology stocks and lower weight in financial (bank) stocks. Finally, emerging markets (MSCI EM) also gained 4%, led by China’s reopening.
US sector performance was uneven in the first quarter. Technology and its related sector enjoyed strong gains highlighting investors’ willingness to look beyond near-term challenges. The expectation that the Fed would need to cut interest rates to curtail the banking crisis sent the technology sector up 21.8% for the quarter, while economically sensitive sectors such as energy and financials suffered losses amid the banking turmoil and recession fears. Financials, the worst-performing sector, fell 5.6% for the quarter.
Across size, bigger stocks did better and within style growth trounced value. Large caps (S&P 500) rose by 7.5% and outperformed small caps (S&P 600), which only rose by 2.7%. This divergent performance can be attributed to the fact that the small-cap index has larger regional bank stock exposure and a lower weight of technology stocks. Finally, across style, Nasdaq, a heavy growth and technology-oriented index, gained 17%, while Dow Jones 30, a value-oriented index often synonymous with dividend payers, was up merely 0.8%.
Bonds recovered in the first quarter after suffering their worst year in history in 2022. Bond yields, which move in inverse to bond prices, fell as markets anticipated the Fed to pause and or cut rates following the banking debacle. US fixed income gained 3% for the quarter. Longer-dated treasury bonds fared the best, up 6.2%, while short treasury gained 1.1%. Lower quality bonds, such as high yield, were also surprisingly resilient and gained 3.6%.
Finally, across other asset classes, commodities fell, gold gained, and REIT stabilized. Oil prices fell 18.7% over concerns about the banking system leading to a recession, taking broad commodities 5.4% lower for the quarter. Gold, viewed as the ultimate safe haven asset, gained 8.1%. Lastly, REITs edged up 1.7%, supported by a slight improvement in mortgage rates.
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