The first quarter rebound

Derek Hamilton

Managing Director, Economist – Ivy Equity Boutique
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By Derek Hamilton

April 11, 2023

After an abysmal 2022, markets bounced back in the first quarter of 2023. The rebound occurred despite continued interest rate increases by the US Federal Reserve, the second- and third- largest bank failures in American history, and declining earnings’ forecasts. Furthermore, the rebound occurred in both the equity and fixed income markets. Given those headwinds, we thought it would be prudent to examine similar times in history.

We compared the current situation with prior periods leading up to a recession. More specifically, we examined the times when the Fed was close to finishing its tightening cycle, or what we would call “peak Fed hawkishness.” In those cases, both equity and fixed income investments tended to perform well for a time, usually between the peak of tightening and when deterioration in economic data accelerated.

Sure enough, though the Fed continued to raise interest rates in the first quarter of 2023, the market increasingly priced in an end to interest rate hikes and a subsequent switch to rate cuts for later in 2023. In other words, we think markets have been in a sweet spot, one where the economic data are still good while interest rate hike fears have begun to dissipate.

As we have previously stated, if we are wrong about our recession call, then markets could rally further for a time. However, the tightness of the labor market could likely result in a more hawkish stance by the Fed. We have high conviction in our recession call, and if history is any guide, the current sweet spot for markets could be relatively short lived. Our fundamental market call hasn’t changed, and we continue to be cautious about risk assets this year.

US market performance, first quarter of 2023
January 1, 2023 – March 31, 2023

Note: Index return data depicted are total returns.

Sources: Macquarie, Macrobond, Bloomberg, S&P Global, and Nasdaq.

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The NASDAQ Composite Index is a broad-based, market capitalization weighted index that measures all Nasdaq US-, and international-based common type stocks listed on The NASDAQ Stock Market and includes more than 2,500 securities.

The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value and is often used to represent performance of the US stock market.

The Bloomberg US Corporate High-Yield Index is composed of US dollar-denominated, noninvestment grade corporate bonds for which the middle rating among Moody’s Investors Service, Inc., Fitch, Inc., and Standard & Poor’s is Ba1/BB+/BB+ or below.

The Bloomberg US Corporate Index measures the performance for US investment grade, fixed-rate, taxable corporate bonds.

The Bloomberg US Treasury Index measures the performance of US Treasury bonds and notes that have at least one year to maturity.

Fixed income securities and bond funds can lose value, and investors can lose principal, as interest rates rise. They also may be affected by economic conditions that hinder an issuer’s ability to make interest and principal payments on its debt. The Fund may also be subject to prepayment risk, the risk that the principal of a bond that is held by a portfolio will be prepaid prior to maturity, at the time when interest rates are lower than what the bond was paying. A portfolio may then have to reinvest that money at a lower interest rate.

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