Spring has arrived and financial markets continue their recovery! Despite considerable volatility along the way, the major market indexes ended in positive territory for the first quarter of 2023. While the stock market remains below its all-time peak, we’ve now had two consecutive quarters of upward movement.
Domestic stocks enjoyed a strong rally in January before backing off in February and early March, influenced by troubles in the banking sector. The high-profile failures of Silicon Valley and Signature banks stoked fears of a broader crisis within the US financial system. Thankfully, the issues have remained relatively contained and most of the initial concerns quickly passed. The stock market responded in kind and rallied in the final two weeks of March.
Despite facing several headwinds over the last twelve months, namely the war in Ukraine, China’s persistent lockdowns, and a strong US dollar, non-US stocks have fared well relative to their domestic peers. The first quarter continued that trend; international stocks experienced movements similar to the US market but benefitted from a stronger rise, outperforming the S&P 500 by about 1%.
Fixed income investments also enjoyed a strong start to the year, with the Bloomberg Aggregate Bond index up nearly 3%. Fixed rates are at nearly the highest level seen in 15 years, offering strong bond yields, plus rates around 4.5% from money markets and CDs. This boost in earnings from “safe money” is likely to be temporary, however, as markets are projecting rates will begin dropping within the next twelve months.
Artificial intelligence, specifically “large language models” like ChatGPT and Google Bard have received considerable attention in recent months. As an experiment, we asked one of those models to draft a summary of stock market and economic news for the first quarter of 2023. It appeared confident in its reply and included a mix of factual data points, interspersed with information that was far from accurate, with talk of all-time high inflation, market losses and more.
Since these AI models are built by being exposed to massive amounts of content, their responses may be shaped by the way in which information is frequently covered and written about. As is often suspected, negative news is more frequently published and shared than positive news, including news relating to financial and economic sectors. This experiment and the response received demonstrated exactly that.
Fortunately, positive news can be found. As noted, stocks have moved upward and notable progress is being made in the fight against high inflation. One of the primary causes of rising inflation has been supply limitations, driven by the pandemic’s disruption of global manufacturing and supply chains. The NY Fed’s Global Supply Chain Pressure Index is now showing a return to “normal” levels. After 37 straight months of above-average readings, it finally moved below its historical average in February.
The second ingredient in the inflation equation is demand; too much money chasing too few goods leads to rising prices. Since the Federal Reserve can’t impact supplies, it has been working to lower demand by raising interest rates – that makes it more expensive to borrow and pulls money out of the economic system. Their efforts appear to be working as economic activity is slowing. Rarely do we hope for a slowdown in economic activity, but if the reduction is small and it stems the tide of inflation, it will provide a boost in subsequent years. Also, as we discussed last quarter, the US economy slowing or entering a recession does not necessarily correspond with a declining stock market.
As always, please let us know of any questions or concerns.
The PWM Team
