Markets finished 1Q higher after a bumpy ride in both equity and fixed income. Uncertainty is likely to persist as the most pressing economic questions around Fed policy, banking sector stability, inflation, and corporate earnings remain unanswered.

KEY POINTS
Banking sector turmoil, inflation and the Fed cloud the outlook
- Three regional bank failures rattled markets and brought fears of another 2008-style financial crisis; by quarter end banking system concerns eased, but remained.
- The Fed hiked rates further in 1Q and gave no indication of stopping near-term.
- Interest rates and yields rose again in 1Q, and the US 2-year Treasury yield surpassed 5% at one point.
- Expectations for a mild recession increased amid concerns that a soft landing won’t be possible with a persistently hawkish Fed.
- Equity markets rebounded after 2022’s decline, led by growth stocks and large technology companies.
- We suggest maintaining an active portfolio approach as relative value between sectors and asset classes continues to change.
Exhibit 1:
Key Markets Performance in 1Q23
In our 2023 outlook we discussed expectations for this to be a year of two halves: the first being as the economy reaches a post-COVID stabilization and the Fed stops hiking rates, and the second dealing with the lagged impact of rate hikes on the economy.
During the first few weeks of 2023 markets cheered easing inflation, strong economic data readings from 2022, and continued strength in the labor market; all of which suggested the potential for a “soft landing”. However, the failure of Silicon Valley Bank in March, followed by Signature Financial, led to a surge in volatility and pullback in equity market gains. Investor optimism, the Fed continued to hike (with no end in sight), and investor began to fear of a full blown recession.
Exhibit 2:
Major Market Performance in 1Q23
With the Fed remaining steadfast in its mission to fight inflation at all costs the outlook for the US economy and markets is uncertain. While economic data from 2022 (and the early part of 2023) suggest the economy is growing, there remains no clarity on the interest rate outlook. And with inflation near 6% (albeit down from 9% in summer 2022 but well above the Fed’s goal of 2%) there is potential for the Fed to keep hiking rates through 2023 and push the economy into recession. In fact, the expectation for a mild recession in 2023 is once again greater than 50%.
For investors, we suggest maintaining discipline in public equities and not chasing momentum. Traditional fixed income presents opportunities, especially with short duration credit yielding over 4%. We suggest being selective in private markets amid valuation concerns and favor funds that can take advantage of potential valuation changes including private credit and secondaries.
Exhibit 3:
US Treasury Yield Curve
Read the Full 2023 First Quarter Recap
Our complete 1Q23 recap includes additional commentary and charts on the economy and markets, as well as an in-depth discussion on the US banking sector and the failures experienced in March 2023.
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ENDNOTES
Disclosures
This commentary reflects the personal opinions, viewpoints and analyses of the author providing such comments, and should not be regarded as a description of advisory services provided by Defiant Capital Group or performance returns of any Defiant Capital Group client. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Defiant Capital Group manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary.
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A word on risk
All investments carry a certain degree of risk, including possible loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Equity investments are subject to market risk or the risk that stocks will decline in response to such factors as adverse company news or industry developments or a general economic decline. Debt or fixed income securities are subject to market risk, credit risk, interest rate risk, call risk, tax risk, political and economic risk, and income risk. As interest rates rise, bond prices fall. Non-U.S. investments involve risks such as currency fluctuation, political and economic instability, lack of liquidity and differing legal and accounting standards. These risks are magnified in emerging markets. This report should not be regarded by the recipients as a substitute for the exercise of their own judgment. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.