First Quarter Closed

By TRG Advisors on April 6, 2023

1. First Quarter Market Recap. The first quarter of 2023 came to a close last week and the S&P 500 finished the quarter up +7.50%; similar to the fourth quarter of 2022, in which the S&P 500 returned +7.56%, and much above the first quarter of 2022, when the S&P 500 fell -4.88%. The S&P 500 Growth outperformed the S&P 500 Value in the first quarter, 9.6% versus 5.2%. There has been a continuous rotation between value and growth for the past two years – further reason we emphasize that the environment supports a stock-picker’s market with pockets of strength and weakness across categories.

Amid all the volatility, the S&P 500 is now +5.5% over the past two years, led by value +11.5%. Going back one more year, the S&P 500 is up +71% over the past three years. Time in the market is far more important and practical than timing the market.

Chart 1: Growth and Value in Rotation, Second-Consecutive Quarter With Positive Returns¹

Fixed income markets also appreciated during the first quarter. The U.S. Aggregate Bond index returned +3.5%. Credit spreads are slightly higher than where they started the year, driven higher by the banking sector volatility, but that was more than offset by falling market interest rates during January and March, which drove bond market price performance.

Large cap stocks outperformed small cap stocks in the first quarter and developed market equities outperformed emerging market equities. Real estate was up modestly, commodity prices moved lower, and gold was up an impressive +8.2%.

Overall, economic uncertainty drove lower interest rates and a flight to less economically sensitive parts of the market. Positive GDP and consumer strength drove equity appreciation. Companies report earnings in a few weeks and markets will closely analyze pricing power, free cash flows, margins and cost management.

2. OPEC+ Cuts Oil Production. OPEC+, the oil cartel that includes a number of Middle Eastern countries and Russia, announced a surprise 1.16 million barrels per day cut to production. Markets had priced in expectations for OPEC+ to hold production steady, and oil prices shot up to $80 per barrel, near its year-to-date highs. Last October, OPEC+ announced a 2 million barrels per day reduction. Saudi Arabia, the top OPEC producer, is leading the group by cutting 500,000 barrels in production per day. Cuts are scheduled to begin in May.¹

The oil cartel is clearly trying to separate its prices from the grasp of the macro environment. WTI crude prices were down -5.7% in the first quarter and are now back roughly flat on the year.

The White House quickly pushed back on the decision to lower production, but cited a decline in U.S. retail gasoline prices by more than $1.50 per gallon since last summer’s peak.

3. Keeping the Trends: Moderating Inflation, Resilient Consumer. Core PCE increased during the month of February, but less than expected. Core PCE is the Fed’s preferred inflation gauge. It measures the prices people are paying for goods and services and excludes volatile components like food and energy. Core PCE increased +0.3% m/m in February, a slowdown from January’s +0.6% m/m pace. Core PCE increased at an annualized +3.7% pace, still well-above the Fed’s 2% annualized target.

Strong pricing power in housing markets and persistent demand for experiences, like restaurants, events and entertainment continue to drive inflation. The price for used vehicles continues to pressure goods inflation downward, but most goods inflation categories are still positive – particularly clothing and footwear.

Personal income also grew in February +0.3% m/m, but this represents a slower pace than seven of the past eight months. Consumer confidence improved during the month of March, while the Michigan sentiment report was down slightly. We continue to root for data that supports the consumer, like rising wages and confidence, but moderate levels – we received this type of data last week. The first quarter highlighted persistent levels, yet moderating pace of inflation and a tight, yet loosening labor market.

4. Fixed Income. Last week, New York Fed President John Williams remarked how the banking turmoil impact is still not fully understood. Representative of the unrest, U.S. bank deposits fell sharply for the second straight week by $125.7 billion. Treasury Yields moved higher through Friday morning, however Friday’s lower than expected PCE reading resulted in yields pushing lower. Still, the 2yr yield ended the week above 4%. After opening the week at +526 bps, the High Yield spread tightened 44 bps through Friday’s close.

5. The Week Ahead.

Earnings – Wednesday: CAG. Thursday: STZ.

Economics – Monday: ISM Manufacturing (March). Tuesday: JOLTS Job Openings (February). Wednesday: ISM Services (March), ADP Employment Survey (March). Friday: Nonfarm Payrolls (March), Unemployment Rate (March).

Return for Selected Indices³

1. Source: FactSet (chart). As of April 2, 2023.
2. Source: Bloomberg. As of April 2, 2023.
3. Source: Bloomberg. As of April 2, 2023.