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.
A rally in July built on the hopes that inflationary pressures were beginning to subside, came to a screeching halt mid-quarter. The market accelerated nearly 14% from July 1st to mid-August, but then spent the remainder of the quarter giving up all those gains and more, down 17%. At the epicenter of the shift in investor sentiment was the Federal Reserve which pounced on the persistently high inflation data as support for further tightening. During the period, the Federal Reserve, European Central Bank and Bank of England all raised interest rates. US markets outperformed non-US markets and emerging markets paced the decline as a stronger dollar continued to weigh heavily on investor returns overseas. The US equity market, as measured by the S&P 500 Index, posted a -4.9% decline for the period with nine of the eleven sectors pushing lower.
Global investment markets continued to push decidedly lower as inflationary pressures, and the corresponding policy response, dominated the market narrative. The US equity market, as measured by the S&P 500 Index, reported its worst first half (down over 20%) since 1962. Unfortunately for investors, bonds also had one of the worst first half starts to a year on record with a return of -10.4% (as measured by the Bloomberg US Aggregate bond index) which is the worst start to a year since the index's inception in 1973. Non-US markets have provided some relative relief though US investors have been pummeled by the headwinds of a stronger dollar. Chinese markets provided one of the few bright spots as prolonged lockdowns were lifted in some major cities. Fixed income markets pulled back over the period as the Fed announced a 75bps increase to their target rate with a growing likelihood of more aggressive measures on the horizon.