Nothing about the first quarter’s performance was linear. The broad-based S&P 500 seesawed throughout the quarter, ending January on a high note before tumbling in February, rising again in March, 3.51%, and ultimately ending the quarter up about 7%.
The tech-heavy Nasdaq made a remarkable resurgence, soaring 9.40% for the month and nearly 17% in its best quarterly gain since the fourth quarter of 2020.
The Dow Jones struggled as it lost 0.10% for the month and eked out a gain of 0.4% for the quarter.
As we flush out what to expect going forward, we note that across the S&P 500 analysts decreased earnings estimates for the calendar year 2023, analysts project earnings growth of 2.1%, well below the longer-term growth rate of 7-8%.
Recently the Federal Reserve raised short-term interest rates by another quarter point. We note that the Fed continues to ignore the money supply, which surged by 40% in the first two years of COVID, the fastest since the 1940s, and has since dropped by the most since the Great Depression. Neither the Fed’s statement on monetary policy nor Fed Chairman Jerome Powell’s post-meeting press conference mentioned the money supply. Nor did anyone in the press ask him one question about it. We wonder why not since M2 is the most obvious explanation for what happened with inflation in the last few years.
Meanwhile, it looks like the federal government has “ringfenced” the financial system against a run on the banks anytime in the near future. We think it’s highly unlikely they’d let a bank fail if they thought it would generate a massive flight of deposits to the largest banks or into money market funds.
It’s important to recognize that current financial problems are very different from those of 2008-09. Back then, the main issue was credit risk (primarily regarding residential real estate loans and securities) and how markets were pricing that risk. Today the primary issue is interest-rate risk (or duration risk) on high-quality bonds. With that in mind, the Fed has set up a new facility for banks that lets them, in effect, offload those securities to the Fed for a small fee, papering over balance sheet problems for banks able to take a small hit to earnings.
The Fed is now forecasting a recession that starts later this year. We agree. The bottom line is that we think the Fed is right about a recession, which means earnings will take a hit and investors should remain wary.
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