In what was a volatile first quarter for financial markets, stock prices were able to push higher with the S&P 500 index registering a 7.5% gain during the first three months of the year. This was quite an accomplishment given the cross currents which the markets endured during the quarter, including a destabilizing liquidity crunch in the banking system, a weakening housing market (with mortgage applications at a 28-year low), coupled with the most restrictive monetary policy administered by central banks in four decades. Overseas, equity markets continued to outperform its U.S. counterparts for a second consecutive year, as international stocks were boosted by the post-pandemic reopening of the Chinese economy, a weak U.S. dollar, and improved business conditions in Europe as they avoided a feared energy crisis related to the conflict in Ukraine.
Investors continue to be wary of the Federal Reserve’s tight monetary policy and its impact on the economy, with the Fed Funds rate having been lifted from 0% to 5% in just twelve months’ time, a record pace. While the Fed appears to be winning its inflation fight, the monetary policy tightening of the central bank is, not surprisingly, increasing the odds of a U.S. economic recession. Cracks in the economy are starting to appear, such as the recent March ISM manufacturing report registering its lowest reading since the Spring of 2020, coupled with February employment data showing job openings falling 6% over the past year.
Looking ahead, the Atlanta Federal Reserve’s model for economic growth, known as the GDPNow model, is downgrading their forecast for GDP growth to 1.5% for the first quarter. Economists will also be closely monitoring upcoming earnings reports from global corporations, where concerns are mounting for a second consecutive quarter of declining profit growth. Even the U.S. consumer is under financial pressure, as higher interest rates have caused Americans to increase their monthly borrowing by the largest amount in 50 years. On the bright side, the market is pricing in an end to tight monetary policy by June, with core inflation heading towards a more comfortable 3% by the end of the year. While the near-term path forward for financial markets will have the usual bumps in the road, future investment opportunities are already developing for diversified, forward-looking, long-term investors.
