Quarterly Performance Update

First Quarter 2023

Turbulence in the global banking industry surfaced late in the quarter, adding to the ongoing threats to growth and asset class performance. Despite the mounting uncertainty, global stocks and bonds generally ended the period with solid gains.

U.S. Stocks

The year started on an optimistic note, as moderating inflation and mounting recession worries triggered expectations for the Federal Reserve (Fed) to stop raising rates. However, the Fed insisted inflation was still too high and the jobs market too robust to end its tightening policy. Policymakers did downshift, though, raising interest rates by only a quarter-point, compared with a half-point hike in December. This action sent stocks tumbling again.

In early March, the rapid collapse of two U.S. banks further pressured stock market returns. But the quick response from the Fed, U.S. Treasury and Federal Deposit Insurance Corp. to provide support helped restore order.

Despite banking industry uncertainty and another quarter-point rate hike from the Fed, stocks rallied in late March to end the first quarter higher. Gains in January and March more than offset February’s loss, and the S&P 500® Index returned 7.5% for the quarter. The information technology sector was the quarter’s strongest, up nearly 22%, while the financials sector was the weakest, down nearly 6%.

International Stocks

A similar scenario unfolded in non-U.S. developed markets, where stocks (MSCI World Ex-USA Index) gained 8%. Early on, European investors tempered their rate-hike expectations amid recession worries and moderating inflation data.

Nevertheless, the European Central Bank announced two half-point rate hikes in the quarter. Banking industry contagion landed in Europe, but the takeover of the troubled Credit Suisse Group helped calm markets.

Meanwhile, the Bank of England raised rates by a half-point in February and a quarter-point in March as inflation surprisingly increased. Elsewhere, emerging markets stocks (MSCI Emerging Markets Index) advanced at a more moderate pace, gaining nearly 4%.

Global Bonds

U.S. Treasury yields generally rose through early March when the collapse of two U.S. banks sparked a flight to quality. Yields plunged on the news to end the quarter lower versus December 31. The two-year Treasury yield fell from 4.42% to 4.03%, and the 10-year Treasury yield dropped from 3.88% to 3.47%. The yield curve flattened but remained inverted.

The Bloomberg U.S. Aggregate Bond Index advanced nearly 3% for the first quarter. All sectors delivered quarterly gains, with corporate bonds and Treasuries outperforming.

Similarly, government bond yields in the U.K. and Europe were volatile but ended the quarter lower. Global bonds returned 2.90% for the quarter. The declining U.S. dollar helped trigger a rally among emerging markets bonds, particularly those denominated in local currency.