Have you ever heard the stock market be compared to a roller coaster? There’s a good reason for this. While sometimes the markets will go through long, relatively flat periods, there are also times when they will rise and fall, climb and dip with astonishing speed.
The first quarter of 2023 was the perfect example of this.
As you know, last year was a turbulent one for investors. Inflation worries, rising interest rates, oil prices, and the war in Ukraine all combined to drag the S&P 500 down 19.4% for the year.1 In fact, it was the worst 12-month span since the financial crisis of 2008.
The good news is that stocks bounced back somewhat in Q1. But this is where the roller coaster analogy really kicks in.
For example, in January, the S&P 500 rose just over 6.5%.2 But in February, the markets dropped 2.6%.2 Things got bumpy in early March, as the S&P rattled up and down like one of those old, wooden roller coasters from the early 20th century. But the markets hit a hot streak toward the end of the month, and as a result, the S&P finished up 7% for the quarter. 3
Some sectors did even better than this. For example, tech stocks – which got hammered in 2022 – have enjoyed a much more positive start to the year. In fact, the Nasdaq, an index made up largely of tech stocks, shot up nearly 17%!3
A roller coaster, indeed.
So, what was behind the market’s latest thrill ride? There are a few factors, but chief among them is the Federal Reserve’s war on inflation. After some data suggested that inflation began cooling off in late 2022, the Federal Reserve started cooling off the rate at which it’s been raising interest rates. In both February and March, the Fed hiked rates by only 0.25%.4 That’s far less than the 0.75% hikes we were seeing previously. This has led many investors to hope the Fed won’t raise rates as high as economists expected.
There are two reasons this matters. First, the higher interest rates go, the greater the chances of our economy entering a recession. Second, higher rates tend to eat into corporate earnings.
Put these two together, and it’s clear why the expectation of lower interest rates – or at least, slower rate hikes – would boost investor confidence.
So, what does all this mean moving forward? Is the roller coaster coming to an end? Is the car pulling into the station?
This is an important time to remember that current market conditions don’t reflect the present – they reflect expectation of the future. Investors expect the Fed to stop hiking rates, so investor confidence goes up. But there are many factors that could cause those same expectations to change in a heartbeat. For example, inflation is still an issue, and there’s no guarantee the Fed won’t keep hiking rates if prices remain high. (Indeed, oil prices are on the rise again, which means other prices could rise as a result.)
Here’s something else to keep in mind. While the S&P 500 rose 7% for the quarter, raw numbers like that don’t always tell the full story. Much of that rally was driven by a small group of stocks overperforming – mainly the aforementioned tech companies. But, as its name suggests, the S&P 500 contains five hundred companies…and most of them barely moved at all. The rally, in other words, was not broad, but narrow.
While it has certainly been nice to see the markets trending up again after such a rough 2022, it’s important that we do not get carried away by a few months of growth driven by relatively few companies. In other words, it’s important we don’t try to get off the ride before the roller coaster has come to a complete stop.
You see, the roller coaster metaphor isn’t important because it’s cute. It’s because it contains good advice. When you board a real roller coaster, you always know generally what to expect. You know it’s going to be bumpy, jerky, fast. You know there are going to be sharp turns that whip your head around and sudden drops that make the pit fall out of your stomach. So, what do you do? You secure your valuables. You buckle your seat belt. You brace yourself. As investors, it’s important that we keep doing that moving forward – so that, ultimately, we end up at the destination we want, having enjoyed the ride.
We’ll continue to be cautious, especially in the short term, keeping our hands and legs inside the vehicle until we get a clearer view of what’s in front of us. And our team will keep watching our clients’ portfolios, doing our best to make the ride as smooth and straight as possible.
As always, if you have any questions or concerns about the markets, please let us know. In the meantime, have a great week, a great quarter, and a great Spring!
1 “Stocks fall to end Wall Street’s worst year since 2008,” CNBC, https://www.cnbc.com/2022/12/29/stock-market-futures-open-to-close-news.html
2 “S&P 500 Index Historical Prices,” The Wall Street Journal, https://www.wsj.com/market-data/quotes/index/SPX/historical-prices
3 “Stocks Close Higher in Last Session of Turbulent Quarter,” The Wall Street Journal, https://www.wsj.com/articles/global-stocks-markets-dow-update-03-31-2023-2eafbb02
4 “The Fed announces ninth-straight interest rate hike of 25 basis points,” CNBC, https://www.cnbc.com/2023/03/22/fed-announces-interest-rate-hike-of-25-basis-points.html