Quarterly Economic Update - Q1 2023

U.S. Markets
Stocks posted solid gains in the first quarter as investors navigated corporate earnings, shifting
monetary signals, and troubles in the banking sector.

For the three months ended March 31, the Dow Jones Industrial Average rose 0.38 percent
while the Standard & Poor’s 500 Index gained 7.03 percent. The Nasdaq Composite led, picking
up 16.77 percent.¹
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“In playing ball, and in life, a person occasionally gets the opportunity to do something great.
When that time comes, only two things matter: being prepared to seize the moment and having
the courage to take your best swing.”

–Henry “Hank” Aaron, a Hall of Famer who hit 755 home runs and played in 25 All-Star games
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A January Rally
Stocks rallied in January, propelled by cooling inflation, a better-than-expected start to earnings
season, and healthy economic data. Where investor sentiment had been weighed down by
concerns over interest rates, a new, more upbeat mood surfaced.

January’s positive momentum carried over into February as stocks continued their climb. A 0.25
percent interest rate hike could not derail the upward momentum, as investors rallied around
Fed Chair Jerome Powell’s constructive comments.

Stocks Stumble in February
However, strong economic data released over the course of February diminished investor hopes
of a pause in rate hikes, which dragged stocks lower.

Fourth quarter earnings were a bit underwhelming, though they generally met the market’s low
expectations. While 68 percent of the companies comprising the S&P 500 exceeded Wall
Street’s earnings estimates, this was below the five-year average of 77 percent. Moreover,
despite the number of positive earnings surprises, earnings declined for the first time since 3Q
2020, falling by 4.9 percent.²

March Twists & Turns
Stocks entered March holding onto modest year-to-date gains, but the final month of the first
quarter would prove to be its most dramatic.

Interest rate fears flared up once again, ignited by congressional testimony by Powell, who
suggested that rates may need to be hiked higher and faster than the Fed had anticipated.³

Banking Sector
Selling pressure accelerated after regulators took over two U.S. banks. Fears then rose that the
banking sector issues were widening after a Swiss bank was taken over by a competitor.

The difficulties within the banking system also changed market sentiment regarding future rate
hikes. While the Fed raised rates 25 basis points in March, Powell hinted that the end of the
rate-hike cycle was nearing.

Stocks steadied as banking fears eased, notching gains at the close of the month and leaving
stocks higher for the quarter.

Sector Scorecard
For the quarter, big gains were posted in Communications Services (+20.80 percent), Consumer
Discretionary (+15.78 percent), and Technology (+21.35 percent), while Industrials (+3.02
percent), Materials (+3.84 percent), Real Estate (+1.22 percent), and Consumer Staples (+0.21
percent) saw modest increases. Energy (-5.30 percent), Financials (-5.99 percent), Health Care
(-4.70 percent), and Utilities (-3.99 percent) all experienced losses.⁴

Yahoo Finance, March 31, 2023. The market indexes discussed are unmanaged and generally
considered representative of their respective markets. Individuals cannot directly invest in unmanaged
indexes. Past performance does not guarantee future results. U.S. Treasury Notes are guaranteed by the
federal government as to the timely payment of principal and interest. However, if you sell a Treasury
Note prior to maturity, it may be worth more or less than the original price paid.

What Investors May Be Talking About in April
In April, companies will start reporting first quarter earnings, but actual financial results may be
of only secondary importance.

The market’s earnings expectations are actually quite low as Wall Street analysts’ earnings
estimates have come down by 5.7 percent between the end of December and February. While
first quarter estimates tend to be lowered, the average cut in earnings estimates over the past
five years was a much more modest 2.3 percent.⁵

Markets may be more interested to hear what corporate leaders have to say about the future,
particularly in light of a more uncertain economic landscape created by recent banking issues.

One potential concern is whether a tighter lending environment will emerge as banks look to
manage risk. Fed Chair Powell referred to this possibility in his post-Federal Open Market
Committee meeting press conference when he suggested that financial conditions may have
tightened more than traditional signs are reflecting.⁶

Over the last three quarters, the number of S&P 500 companies citing “recession” on their
earnings calls fell from 241 to 148. Investors may look to see whether these diminishing
concerns over recession reverse in the weeks ahead.⁷

World Markets
Investor optimism grew overseas as well, as Europe emerged from winter in far better shape
than feared, and China continued its reopening progress.

For the quarter, the MSCI-EAFE Index jumped 7.65 percent.⁸

European markets were up strongly for the three-month period. Italy picked up 14.37 percent,
France tacked on 13.11 percent, and Germany added 12.25 percent. However, the U.K. lagged,
gaining just 2.42 percent for the quarter.⁹

Returns were much more subdued in Pacific Rim markets, with Hong Kong adding 3.13 percent,
and Australia rising 1.98 percent. Japan was among the better performers, gaining 7.46
percent.¹⁰

Yahoo Finance, March 31, 2023. The market indexes discussed are unmanaged and generally
considered representative of their respective markets. Individuals cannot directly invest in unmanaged
indexes. Past performance does not guarantee future results. International investments carry additional
risks, which include differences in financial reporting standards, currency exchange rates, political risks
unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These
factors may result in greater share price volatility.

Indicators

Gross Domestic Product:The nation’s economy grew at a 2.6 percent annualized rate in
the fourth quarter, which was revised from the earlier estimate of 2.7 percent.¹¹

Employment: The unemployment rate rose to 3.6 percent, from 3.4 percent, reflecting a jump
in the number of people looking for work. The increase in the number of job seekers helped
relieve wage pressures. Wage growth increased a less-than-expected 4.6 percent.¹²

Retail Sales: Retail sales declined 0.4 percent, dragged lower by weak auto sales and food
and drink services.¹³

Industrial Production:Industrial output was flat in February, though January’s initial flat
estimate was revised higher to a 0.3 percent gain.¹⁴

Housing:Housing starts rose 9.8 percent––the first increase in six months. The increase was
driven by a 24.0 percent increase in multifamily construction. Single-family home starts were up
a more modest 1.1 percent.¹⁵

Sales of existing homes gained 14.5 percent in February, marking the first increase in 12
months and the largest increase since July 2020. The median price decreased slightly (-0.2
percent) from February, to $363,000.¹⁶

New home sales rose for the third straight month, climbing 1.1 percent in February; however,
year-over-year sales declined 19.0 percent.¹⁷

Consumer Price Index: Year-over-year consumer prices rose 6.0 percent in February, down
from 6.4 percent the month before––the slowest pace since September 2021. The monthly
increase of 0.4 percent was in line with market expectations. Core prices (i.e., excluding energy
and food) increased 0.5 percent, a rise that was slightly higher than last month’s 0.4 percent
rise, though its year-over-year increase of 5.5 percent was in line with the consensus forecast.¹⁸

Durable Goods Orders:Durable goods orders fell 1.0 percent in February, marking the third
out of the last four months that new orders for long-lasting manufactured goods have dropped.¹⁹

The Fed
The Fed implemented two rate hikes of 0.25 percent, one each in February and March, in its
year-long effort to combat inflation.²⁰

The March increase came after regulators took control of two regional banks, which raised some
fears about the banking sector.²⁰

The official announcement accompanying March’s rate hike decision hinted that the Fed soon
may be done raising rates. The statement also reiterated the Fed’s belief in the banking
system’s soundness, while acknowledging that it was too early to determine how banking issues
may impact the economy.²⁰

Fed Chair Powell, in his post-meeting press conference, said that consideration had been given
to not hiking rates, but that the Federal Open Market Committee believed that elevated inflation
and solid economic activity were reasons to raise rates despite concerns about the banking
sector.²⁰

By the Numbers: A Cautiously Hopeful Q1
$575.1 billion: The mergers and acquisitions volumes in Q1 2023²¹

+3.2%: The percent change in retail sales between December 2022 and January 2023²²

30%: The percentage of U.S. workers who reported feeling burnt out in Q1 2023²³

$10 billion: The private amount invested in U.S. renewable energy projects in Q1 2022, a record
high for the quarter²⁴

173.37 million: The number of doses of flu vaccine distributed in the United States for the
2022-23 flu season²⁵

59.9%: Increase in the number of homes for sale in the U.S. compared with 2022²⁶

1.3%: percentage of S&P 500 companies that beat analysts' earnings estimates for Q4 2022²⁷

$3.9 billion: The amount invested in U.S. fintech startups in Q4 2022²⁸

41%: The percentage of Americans who are better off financially in 2022 compared with 2021.²⁹

168: The number of tornadoes reported in the U.S. in January 2023––nearly five times more
than the 10-year average³⁰

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The market indexes discussed are unmanaged and generally considered representative of their
respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not
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The Dow Jones Industrial Average is an unmanaged index that is generally considered representative of
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International investments carry additional risks, which include differences in financial reporting standards,
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The Hang Seng Index is a benchmark index for the blue-chip stocks traded on the Hong Kong Stock
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