The tech-heavy NASDAQ Index surged nearly 17% in the 1st quarter, rebounding from a 33.10% decline in 2022. The S&P 500® was also in positive territory, with a total return (including dividends) of 7.50% for the quarter.
After a steep 28.19% drop in 2022, the Information Technology sector of the S&P 500 was up 21.82% in the 1st quarter, as investors migrated to stocks they believed could best weather ongoing inflationary pressures. Communication Services, which tumbled 39.89% last year, jumped 20.50% in the 1st quarter this year.
Meanwhile, the inflation-fighting monetary policy of the Federal Reserve (Fed) churned up problems in the banking industry. A few regional banks faced heavy losses in their fixed income holdings and were forced to seek rescue financing or closure. The first to be shut down was Silicon Valley Bank in California, which ceased operations on March 10, followed by Signature Bank in New York two days later. The biggest domino to fall was Credit Suisse, Switzerland’s second largest lender, which was acquired by UBS Group March 19 after facing billions of dollars in losses.
The banking crisis was triggered by realized and unrealized losses on fixed income holdings at the troubled banks. Their problems were caused by the rapid increase in interest rates by the Fed, along with what appears to be poor risk management by the banks. As interest rates rose, the banks’ existing lower-interest bonds and mortgage-backed security holdings continued to decline in market value.
Despite the banking dust-up, the Fed still raised rates an additional 0.25% in March, bringing to 5.0% the total increase since the Fed began raising rates early last year.
The Fed’s efforts have had some effect at slowing inflation – energy prices have dropped, corporate earnings growth has slipped, and manufacturing activity has declined – but consumers are still facing sticker shock.
The Consumer Price Index (CPI), a common gauge of inflation, was up 0.4% in February and 6.0% over the previous 12 months, according to the March 14 Bureau of Labor Statistics report. Excluding food and energy, the index was up 5.5% over a year earlier, the smallest 12-month increase since December 2021.
Consumers are paying 14.6% more now for transportation services than they were a year ago, through February, while energy services are up 13.3%. Whether you dine out or eat in, you’re now shelling out a lot more than a year ago. Food at home is up 9.5%, while food away from home is up 10.2%. However, commodities not including food and energy are up only 1.0% from a year earlier.
The cost of used cars, after spiking after the pandemic shutdown, has dropped 13.6% since a year ago. Apparel is up 3.3%, medical care is up just 2.1%, and shelter – which is affected by higher mortgage rates – is up 8.1%.
The rising prices may be affecting consumer spending. While personal income was up 0.3% in February and disposable personal income was up 0.5%, consumer spending tapered off. Personal consumption expenditures (PCE) were up just 0.2% in February after a 2.0% rise in January, according to a March 31 Bureau of Economic Analysis report.
Employment has remained strong with job growth reaching 27 consecutive months in March, according to the Department of Labor. With more than 10 million job openings in the U.S., employment may continue to tick up in future months.
The manufacturing sector has been affected by the Fed’s tightening efforts. Manufacturing activity declined in March for the fifth straight month after 30 consecutive months of growth, according to the Institute for Supply Management (ISM) report issued April 3. Only six of the 18 industries tracked by ISM reported growth in manufacturing activity in March, while the other 12 reported a decline.
U.S. stocks rebound
After dropping nearly 20% in 2022, the S&P 500® Index was up 7.03% in the 1st quarter of 2023, from 3,839.50 at the end of 2022 to 4,109.31 at the March close. The total return of the S&P 500 (including dividends) was 7.50%. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)
The NASDAQ Index was up 16.77% in the 1st quarter, from 10,466.48 at the close of 2022 to 12,221.91 at the end of March. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)