Posts tagged: global economy

Following the worst year since 2008 for US stocks, the first quarter of 2023 was a positive shift. However, returns for the major US indices varied considerably as the S&P 500 ended the quarter up 7.03%, the Dow Jones Industrial Average gained a modest 0.38%, while the Nasdaq Composite soared 16.77%. Growth fared well in the quarter as it outperformed value. The same can be said for large caps as they outpaced small caps during Q1.

Within the US Treasury market, interest rates generally increased in the ultrashort-term and decreased in the short- to long-term segment. After a disappointing 2022, when high-quality bonds did not hedge equity market downside risk, fixed income bounced back with a positive return for the quarter. The Federal Reserve continued to raise interest rates and delivered a 0.25% hike both times it met during the quarter. These follow previous increases of 0.50% and 0.75% seen in Q4 of 2022. Inflation continues to take its toll on consumers as monthly wage growth has lagged inflation going on two years now. The Federal Reserve is expected to raise rates at least one more time and hold these levels through year end.

On Friday, March 10th, regulators took control of Silicon Valley Bank as a run on the bank unfolded. Two days later, regulators took control of a second lender, Signature Bank. With increasing anxiety, many investors are eyeing their portfolios for potential exposure to these and other regional banks.

The market outlook still remains uncertain going forward as corporate America continues to engage in layoffs and hiring freezes. Home mortgage and auto loan rates have doubled since last year, which will slow growth as the cost of capital increases. Stock ownership remains a good long-term investment option to help keep pace with the impact of taxes and inflation.

The decline in December partially offset a vigorous rally earlier in the final quarter of 2022. The S&P 500 ended the quarter up 7.08%, the Dow Jones Industrial Average gained 15.39%, while the Nasdaq Composite lost -1.03%. The US equity market posted positive returns for the quarter; large caps outperformed small caps and value outperformed growth. The same held true for the entire year. Developed markets outside of the US also posted positive returns for the quarter and outperformed both US and emerging markets.

Albeit smaller than the three interest rate increases we saw in Q3, the Federal Reserve ended the year in December with another 50 basis point bump. It is unclear how long the Fed will continue to hike interest rates to bring inflation down to its 2% target. Investors were faced with the challenge of a bear market compounded with the worst bond market performance in modern history. Fixed income posted historic declines rather than serving as a buffer against stock volatility as they have historically done in most down markets. It has been decades, going back to 1969, since the last time both stocks and bonds were negative in the same year.

This past quarter capped off what was a volatile ride in the market over the past year. The upcoming year expects to endure a lot of the same as pessimism remains rampant with growing recession talks. Though, the last few years have shown us that investors are rewarded for sticking to a long-term investment plan.

While Q3 was not as bad as Q2, the market continued its downward trend and posted negative numbers resembling the losses realized in Q1. The S&P 500 ended the quarter down -5.28%, the Dow Jones Industrial Average was off -6.66%, and the Nasdaq Composite lost -4.11%. The Federal Reserve remains in the spotlight and during their meeting last month they raised the federal funds rate by another 0.75 percentage points. This marked the third consecutive increase of 75 basis points and overall was the fifth rate increase this year. The target rate range now sits from 3.00% to 3.25%. Their efforts to combat skyrocketing inflation has shown mild success which leads economists to believe more increases are on the way in Q4.

The US stock market -4.46% (Russell 3000 Index) fared better for the quarter than the international stock market -9.20% (MSCI World ex USA Index). Domestically, growth outperformed value and small caps outperformed large caps. Energy (-0.8%) and consumer discretionary (-3.1%) were the top two performing sectors while communication services (-13.7%) and real estate (-14.2%) were the bottom two performing sectors. In terms of bonds, the global bond market -2.21% (Bloomberg Global Aggregate ex-USD Bond Index) fared better than the US bond market -4.75% (Bloomberg US Aggregate Bond Index). Interest rates increased across all bond maturities in the US Treasury market for the quarter.

The continued uncertainty regarding historically high inflation, interest rate hikes, growing geopolitical tension, and the upcoming midterm elections have investors on edge. Despite the outcome of the election and if and when a recession is declared, the most sensible approach is to remain disciplined with one’s asset allocation; in the long-term markets have rewarded those who have stayed invested.

After a less than stellar first quarter to start 2022, US stocks had a rough second quarter. The S&P 500 ended the quarter down -16.45%, the Dow Jones Industrial Average was off -11.25%, and the Nasdaq Composite lost -22.44%. A major driver to this year’s equity market downturn continues to center around whether the Federal Reserve’s interest rate tightening cycle will modestly cool the US economy or lead to a recession as it attempts to suppress inflation. They admitted the inflationary pressures have proven more steady than transitory and after a rate hike in March, the Fed raised short-term interest rates twice in the past quarter. The 50 basis-point increase in May was followed by another 75 basis-point increase in June, the largest hike since 1994.

Rising prices are not unique to the United States and are prevalent worldwide. European energy and commodity prices are hampering other countries and could push many of the continent’s economies into recession and add pressure to a global slowdown. While the Fed has been ratcheting up their efforts to curtail inflation here at home, they don’t have the same ability to influence inflation internationally. Both emerging markets and non-US developed markets posted negative returns for the quarter with emerging markets outperforming the US and non-US developed markets.

While the Bureau of Labor Statistic’s unemployment rate remains near record lows, the CPI, following a decades high increase record reported on last quarter, is expected to continue to rise. Supply chain disruptions, pent-up consumer demand, and the hefty stimulus have all contributed to inflation. The current restrictive monetary conditions and the hampering of US equities year-to-date have raised uncertainty for consumers leaving them more constrained and the consumption binge has stalled as a result. Whether accompanied by recessions or not, market downturns can be unsettling. But over the past century, US stocks have averaged positive returns over one-year, three-year, and five-year periods following a steep decline.

The first quarter gave back some of the recent returns with the major indices posting negative numbers for the quarter. The S&P 500 ended the quarter down -4.95%, the Dow Jones Industrial Average was off -4.57%, and the Nasdaq Composite lost -9.10%. The US equity market posted negative returns for the quarter and underperformed non-US developed markets, but outperformed emerging markets. Value outperformed growth and large caps outperformed small caps. For the quarter, interest rates increased across all maturities in the US Treasury market as well as the global developed markets.

The major indices posted healthy returns in the fourth quarter to cap off a strong year. The S&P 500 ended the quarter up 10.65%, the Dow Jones Industrial Average climbed 7.37%, and the Nasdaq Composite finished up 8.28%. For 2021, the annual returns were 26.89% for the S&P 500, 18.73% for the DJIA, and 21.39% for the Nasdaq Composite. On the fixed income side, it was another underwhelming quarter for the bond markets to close out a decline for the year. The potential for rate hikes by the Fed came sooner-than-expected and combined with high inflation weighed on most of the bond market. Internationally, developed markets were positive for both the quarter and the year, but underperformed US equities. Emerging markets declined for both the quarter and the year.

10 of the 11 S&P 500 sectors were positive in Q4 with Communications as the lone laggard for the quarter. Energy posted another strong quarter and ended the year with the highest sector increase due to significant gains in oil futures and other commodities after the economy continued to reopen and demand increased. Large cap stocks outperformed small cap in the US equity market and large cap growth outperformed value, but value outperformed growth in small cap stocks.

This past year continued to illustrate how resilient the markets have been since the pandemic began in 2020. The year ahead will present challenges to economic growth and market returns, including a reduction in global stimulus, high inflation pressures, political uncertainty, and the ongoing handling of the virus. The record-high stock prices continue to leave some investors mixed about the trajectory of the market and apprehensive that these new highs foreshadow a downward turn in the future. As pointed out in a recent article, if stocks have a positive expected return, reaching record highs with some frequency is exactly the outcome we would expect.