Looking Back at the Markets in Q1 and Ahead to Q2 2023

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After a weak February, markets rallied in March. U.S. markets were up by low single digits, while bond markets were in the same range. International markets also showed modest gains, with developed markets about the same as the U.S. and emerging markets doing slightly better. For the quarter as a whole, the Nasdaq did best and moved into a bull market by some measures, followed by developed international markets and the S&P 500. This was a stronger start to 2023 than most had expected, and it may signal how the rest of the year will play out.

Looking Back

The markets. The S&P 500 gained 3.67 percent in March, while the Dow Jones Industrial Average (DJIA) rose 2.08 percent. The Nasdaq Composite did the best of the three indices, with the technology-heavy index up 6.78 percent. For the quarter, the S&P 500, DJIA, and Nasdaq gained 7.50 percent, 0.93 percent, and 17.05 percent, respectively.

International markets also showed gains. The MSCI EAFE Index rose 2.48 percent in March, and the MSCI Emerging Markets Index had a 3.07 percent gain. For the quarter, the MSCI EAFE Index did best, gaining 8.47 percent, while the MSCI Emerging Markets Index gained 4.02 percent. Even fixed income did well, with the Bloomberg Aggregate Bond Index up 2.54 percent for the month and 2.96 percent for the quarter. The 10-year U.S. Treasury yield dropped from 4.01 percent at the start of the month to 3.48 percent at month-end.

Inflation. The progress on inflation drove the gains during the quarter. While it is still too high, it is well below where it started the year. With the Fed having hiked rates at a fast pace, markets are now convinced that inflation will come under control, as the benchmark yield on the 10-year U.S. Treasury dropped significantly in March.

The economy. While financial markets showed gains during the last month and quarter, the economy showed signs of slower growth. Labor market indicators, including job openings and hiring, continued to slow, while some measures of consumer confidence in present conditions ticked down. Business confidence indicators also declined. The manufacturing survey stayed in recessionary territory, while the service sector dropped from its previous strong level. While a recession is not likely in the immediate future, signs indicate that the economy is continuing to slow, and a recession may appear by year-end.

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