Optimism and fear drove markets in equal measure this past quarter. The year started off with a strong rally as the prevailing sentiment was that inflation was easing and if a recession did occur it would be mild. The MSCI All Country World Index (ACWI) ended the month of January up 7.17%. Doubts came creeping in late February and global stocks fell 2.9%. Then all-out fear drove markets sharply down in early March as the possibility of a full-blown banking crisis was raised with the collapse of Silicon Valley Bank and the regulatory takeover of Signature Bank. Quick action in the U.S. and abroad to stabilize the banking system allayed fears over the coming weeks and most segments of the market rallied to end the quarter in positive territory for the year.
While we can wish that the strong market ups and downs driven by the back and forth between optimism and fear would abate, that seems unlikely in the near term. Inflationary pressures appear to be easing but there is still a great deal of uncertainty about how things will play out in the short term. There is also the looming debate over the U.S. debt ceiling. No politician is motivated to have their political career wrecked by the economic fallout of a true default but there seems to be no doubt that there will be much political wrangling leading up to the final outcome. The lack of a clear path to resolution seems likely to drive volatility in the market. As we saw with the post-bank scare rally in late March, even in times of fear and uncertainty, markets can deliver positive returns.
We have seen continued strength in some sectors and major shifts in other areas. Even before the March banking scare, U.S. mega-cap growth stocks had been rebounding in ways not seen since late 2020. Ninety percent of the S&P 500’s gain in the first quarter came from the top 10 stocks and 50% from the top five. Whether this trend will continue or is simply driven by investors seeking perceived safety remains to be seen. While valuations of U.S. large-cap and U.S. growth stocks have fallen from their 2021 highs, by most measures, they remain above historical averages and above the valuations of small-cap and value stocks. While valuations can have some predictive power over long time frames, markets continue to remind us that in the short term anything can happen.
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