Despite continued geopolitical events and a potential banking crisis, markets remained focused on the economy and central banks’ attempts to control inflation. The quarter started with relative optimism after the lowered expectations of 2022 and nearly all asset classes fared well. Despite the failures of some midsized banks, and the buyout of Credit Suisse, markets have largely shrugged off the risk of further economic fallout from a broader banking crisis. The contractionary effect of the bank failures and the risk reduction of other banks may be more effective in reducing inflation than another rate hike.
The first quarter ended with positive returns for both stock and bond markets, despite a bank crisis that has led to tighter credit conditions and higher volatility. During the quarter, MSCI ACWI IMI and S&P 500 gained 6.95% and 7.5%, respectively, largely driven by U.S. tech stocks. Following one of the worst years for bonds in history, global bonds rose by 3.01% as bond yields fell on the back of changing expectations of economic growth and Federal Reserve’s policy.
Uncertainty reigned in the economic outlook and the future path for the Federal Reserve rate hikes. For example, market expectations for Fed policy at its upcoming May meeting reached a high of 5.36% on March 8 after stronger-than-expected jobs and inflation reports. Following the failure of Silicon Valley Bank rates fell below 5% by the end of the quarter.
International markets were mixed. European equities (+10.3%), Asia-Pacific equities (+5.4%) and Emerging Market (EM) equities (+4.5%), meant international equity market returns were overall on par with U.S. markets (+7.6%) this quarter.