Defying predictions, the economy continues to chug along helped by shoppers who showed few signs of taking a pause as the year began. Retail sales were up 3.2% in January and then fell only a slight .4% in February. The strong consumer demand is proving to be a detriment to the Federal Reserve’s (the Fed) efforts to reduce inflation by slowing down the economy. The latest data available showed the inflation rate moving up slightly in February to 6% from 5.7% in January as measured by the Consumer Price Index.
The jobs situation is likely aiding shopper’s confidence. The February unemployment rate moved up slightly to 3.6% from January’s 3.4% but it remains a very tight labor market. Despite the big company layoffs making headlines, new weekly unemployment claims spent the entire first quarter of 2023 at levels below the five-year average.
After three quarters of aggressive rate increases, the Fed only raised its Fed Funds interest rate a quarter of a percent in the first quarter. Fed Chairman Powell noted during the quarter that the Fed felt it was getting near to its target interest rate. But developments in the banking sector coincided with the Fed’s meeting in March also likely influenced the decision. The Federal Deposit Insurance Corporation (FDIC) quickly took over two mid-sized banks in mid-March that catered to businesses. The FDIC took the unprecedented step of guaranteeing all deposits in these banks to calm concerns nationwide about the health of all but the biggest banks. Some depositors did shift their savings to the biggest banks but only one additional bank has been deemed in need of assistance as of the end of the quarter.
The uncertainty in the banking sector kicked up the volatility in the stock market but it did not derail the market’s rally in the quarter. Stocks finished the quarter up 7.48% as measured by the Russell 3000 Index. News that technology companies were tightening their belts powered the technology sector up 21.62% per the Technology Select Sector SPDR Index while the Communications Services Select Sector SPDR Index was up 21.12%. Not surprising, the financial sector was the biggest loser for the quarter falling 5.53% per the Financial Select Sector SPDR Index.
International stocks also experienced a good quarter, rising 6.87% per the MSCI Global Stock Ex-U.S. Index. European stocks were up 10.56% according to the MSCI European Total Return Index. Emerging markets were also up 3.96% per the MSCI Emerging Markets Index.
The bond market was cheered by the Fed’s indications that it was reaching its interest rate goal. Overall, the Bloomberg U.S. Aggregate Bond Index was up 2.96% for the quarter. Government bonds gained 3.0% per the Morningstar U.S. Treasury Bond Index. U.S. Corporate bonds were also up 3% per the Morningstar U.S. Corporate Bond Index.
The banking situation pushed gold prices back over $2,000 per ounce for the first time since Russia invaded Ukraine. The price of the precious metal has remained near that mark since mid-March.
The Consumer Price Index measures the change in the cost of living by tracking the prices of a basket of consumer goods and services. The Fed Funds rate is an interest rate the Federal Reserve charges banks to borrow from it for very short periods of time. The Russell 3000 Index tracks the performance of the stock of the 3000 largest publicly traded companies in the U.S. The Technology Select Sector SPDR Index tracks the performance of the technology sector companies in the S&P 500 Index. The Communications Services Select Sector SPDR Index tracks the performance of the communications service sector companies in the S&P 500 Index. The Financial Services Select Sector SPDR Index tracks the performance of the financial services sector companies in the S&P 500 Index. The MSCI ACWI-ex U.S. Index represents the performance of large- and mid-cap stocks across 22 developed and 27 emerging markets excluding the U.S. The MSCI European Net Total Return Index captures large and midcap securities traded in 15 developed stock markets in Europe. The MSCI Emerging Market Index captures large and midcap securities traded in 27 emerging country stock markets. The Bloomberg Barclays U.S. Aggregate Bond Index represents the performance of a portfolio consisting of U.S. Treasury, mortgage-backed, and corporate bonds with a term of approximately 5 years to maturity. The Morningstar Corporate Bond Index measures the performance of investment-grade debt with maturities greater than 1 year. The Morningstar U.S. Treasury Bond Index measures the performance of fixed-rate U.S. Treasury bonds with maturities greater than one year.
The opinions expressed in this article are those of author and should not be construed as specific investment advice. All information is believed to be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Indices are unmanaged and do not incur fees, one cannot directly invest in an index.