A look ahead: Second quarter 2023 outlook
Fixed income market
Treasury yields are decidedly lower than the current rate of inflation. It is important to the Federal Reserve (Fed) that it remain resolute in fighting inflation and that investors are confident in this conviction.
It seems unlikely that the Fed would reverse policy and begin cutting rates later this year. However, that prospect may change if we see further negative surprises from the banking industry or a rapid slowdown in the economy.
Current yields of 8–12% in the higher-risk areas of the fixed-income market rival or exceed expected equity market returns. Investing in this area should be viewed as an alternative not to higher-quality fixed-income investments, but closer to equity investments.
Mega-cap technology stocks have recovered strongly as investors migrate back to high-quality, low-capital-intensity, and less cyclical stocks.
From a longer-term standpoint, smaller-capitalization and value equities remain historically cheaper relative to larger-capitalization growth equities. However, these sectors of the equity market perform better when the economy transitions from contraction to expansion.
International and emerging-market equities had been performing well until the surprising banking turbulence. Like small-cap and value U.S. stocks, international stocks will need to see clearer economic skies to truly regain their performance footing.
What is needed to get more aggressive across fixed income credit and equities?
More attractive overall valuations along with clear evidence that inflation is retreating, an easing of Fed monetary policy, stability in the banking and financial system, and a stable economy poised for expansion.