The “Recession of 2023” that was widely forecasted failed to materialize this year. While economic data has remained favorable, there are signals that we are not out of the woods on recession. To name a few, leading indicators remain negative on a year-over-year basis; the unemployment rate, while still low, has moved above the 12-month moving average; and monetary policy remains in restrictive territory. However, rather than trying to time a recession, we advocate for constructing resilient portfolios as market volatility and recessions are a normal part of investing.
The Federal Reserve paused in September, following a 25 basis points rate hike in July. The major theme coming from the meeting was the potential and willingness of the Fed to remain higher-for-longer in an effort to combat inflation and bring it to its 2% target. The resulting move in interest rates resulted in short-term pain in both fixed income and equity markets, but we may be at or near the end of the rate hiking cycle. Markets have typically fared well following the last rate hike and high-quality fixed income has historically outpaced cash in such an environment.
Having just come through a regional banking storm in the first quarter, markets once again persevered through additional uncertainty as political brinkmanship pushed the U.S. debt ceiling resolution to the 11th hour. This pessimism and concern were complimented by AI optimism and equity markets rallied in the last month of the quarter, fueled by large cap technology companies.
Markets grappled with countervailing forces in the first quarter, but ultimately the bulls won the day with prices broadly up in the first three months of the year. On the positive side, strong economic data provided renewed hope for a “soft landing.” The bears roared to a crisis of confidence in banking and falling corporate earnings. The Federal Reserve landed in the middle, sticking to its rhetoric of fighting inflation but doing so with modest increases.
Equity markets got off to a strong start to begin the period as easing inflationary pressures and a resilient US consumer amplified hopes for a soft landing. However, that optimism quickly faded in December as economic data and central banks globally continued to sound the alarm that more trouble lay ahead. During the period, the Federal Reserve, European Central Bank, Bank of England and even the Bank of Japan all raised interest rates. US markets underperformed non-US markets and emerging markets provided middling results as a weaker dollar amplified investor returns overseas. The US equity market, as measured by the S&P 500 Index, posted a 7.6% increase for the period with nine of the eleven sectors pushing higher.