All major market indices finished the quarter with positive returns. Equity markets, as measured by the S&P 500 Index, rose by 7.5% during the first quarter after finishing 2022 down 18.1%.
Seven of the eleven S&P 500 sectors finished the first quarter with a positive return. The three top performers during the quarter were the three worst performing sectors in 2022. Communication services was one of the best performing sectors in the first quarter due to strong gains from internet-focused tech stocks, as lower rates and the rotation to mega-cap tech companies pushed the sector higher. Consumer discretionary, which has larger weightings towards tech-based consumer companies such as Amazon, also posted positive gains as the labor market remained more resilient than expected, improving the prospects for consumer spending in the months ahead.
By market capitalization, large caps outperformed small caps, as they did throughout 2022. Concerns about sources of funding should the banking crisis worsen, and higher interest rates, weighed on small caps as smaller companies are historically more dependent on financing to maintain operations and spur growth.
From an investment style standpoint, growth outperformed value which was a reversal from 2022. Tech- heavy growth funds benefited from the decline in bond yields and a late-quarter “flight to safety” amidst the regional banking crisis. Value funds, which tend to have larger weightings towards financials, were plagued by concerns about a potential broader banking crisis.
Foreign markets performed in line with domestic markets in the first quarter. Foreign developed markets outperformed the S&P 500 Index during the quarter as economic data in Europe was better than expected and European banks were viewed as mostly insulated from the U.S. regional bank crisis, with the exception of Credit Suisse which was forced to sell to UBS. Emerging markets produced slightly positive returns during the quarter but underperformed the S&P 500 Index largely due to elevated geopolitical stressors (e.g., US – China tensions) and projected weaker global growth in 2023.
U.S. consumer inflation rates continued to slow after reaching a multi-decade peak of 9.1% in 2022. Cooling inflation allowed the Federal Reserve to ease up on raising interest rates; however, the regional banking crisis raised concerns about a recession which fueled a broad bond market rally in the first quarter.
Inflation, as measured by the Consumer Price Index (CPI-U), grew at a pace of 5% for the past 12-month period ending March 31, 2023, marking the smallest 12-month increase since May 2021. The core inflation reading, which excludes food and energy, rose 5.6%. The energy index decreased 6.4% offsetting the increase in the food index of 8.5% over the last year.
Both the unemployment rate at 3.5% and the number of unemployed U.S. workers at 5.8 million remained basically the same in March, and have shown little movement since the beginning of 2022. The labor participation rate trended upward in March to 62.6%.