While I think the bulls made great strides in the first quarter, I think it’s too early to say we’re completely out of the woods. So I thought it would be a great time to look back on the first quarter of 2023 and review the factors influencing the S&500 and what we can learn from it to outperform in the weeks and months ahead. Read on to find out more….
(Please enjoy this updated version of my weekly commentary originally posted April 7e2023 in the POWR Bulletin Stocks Under $10).
The first quarter of 2023 is officially in the books. And man, that was weird. Pretty much the only thing anyone seems to have predicted correctly was that it was LOADED with volatility.
I went back and read a number of reports year to date to see exactly what the experts told us to expect for the first quarter and beyond.
What was planned at the beginning of the year
1) The recession hits in the first half. Whether it was a mild “soft landing” or a classic recession that hits every corner of the economy was up for debate, but almost every pundit predicted that we would have some sort of recession, most likely in the first half of the year. .
2) Sell, sell, sell. Nearly every voice in the room was bearish in 2023, with most forecast for a further downturn in the first quarter. Many thought we would test the October 2022 lows – or even set new lows – early in the year before rising again in the second half.
3) Prepared, hiiiiiiiiii! (I know it’s a lame joke, but I can pull it off because I’m from Texas and football is one of our top three exports.) We’ve seen an unprecedented pace of rate hikes in 2022 , and many pundits believed it would continue steadily through 2023…or as long as inflation remains elevated. Interestingly, many individual investors continued to trade the market as if the Fed was going to pause or even cut in March.
4) The company’s turnover for the year decreases. This was also part of the recession equation. Even so, the consensus analyst estimate for the S&P 500 (TO SPY) the net profit margin was 12.3%, higher than the estimated net margin of 12% for 2022. more important.
5) Growth stocks, tech stocks and cryptocurrencies suffer. These were some of the worst performing groups in 2022, and with most pundits expecting more of the same from the Fed, it only made sense that these groups would continue to have the end of the stick. Many experts have also suggested staying away from retail and leisure businesses, as they are sensitive to the economic cycle.
6) Quality companies are safe to buy. We’ve seen a number of market strategists recommend buying the sell on quality companies, as they would be the most likely to survive (and potentially thrive) in a recession. Additionally, companies with large debts on their books would be more likely to falter as economic conditions deteriorate.
7) Tech and small cap stocks rebound once the bottom is reached (likely later in the fall or early 2024). While many analysts agreed that technology and small caps would perform poorly in the first six to nine months of the year, many agreed that the expected slowdown would pave the way for a strong recovery.
Wow. We were VERY bearish at the end of 2022. Personally, my biggest prediction for the year is that the Federal Reserve would still be a big mover in the market, for better or for worse. And that we would continue to see bulls and bears arguing over the ~secret special meaning~ behind every word that came out of Powell’s mouth.
What we actually saw in the first quarter
1) Buy, buy, buy! To the surprise of many investors, two of the main indices posted a significant increase in the first quarter. The S&P 500 (TO SPY) ended the first quarter up 7% and the Nasdaq up 20.5%. The Dow – which is made up of the major high-quality stocks that analysts recommended – was the worst, up just 0.4%.
2) Growth stocks, technology and crypto were the big winners. Although many analysts said these were exactly the companies to avoid, they were the best performers in the first quarter. The top five returns for the first quarter were…
FSLY (small cap cloud service provider) +116.8%
COIN (crypto exchange operator) +90.9%
NVDA (megacap semiconductor) +90.1%
META (mega-cap tech conglomerate, aka Facebook) +76.1%
EVGO (small cap electric vehicle charging stations) +74.3%
Much of these strong returns are likely due to forward-looking investors focusing on a pause in rate hikes (which will benefit tech, growth and risk stocks) COMBINED with the fact that many stocks in this category saw strong sales in 2022, so they were beaten to begin with.
3) The Fed…didn’t make it easy. First they seemed to turn dovish, then hawkish again, then dovish again when the central bank decided to let the data open the way. Now, there’s nothing inherently wrong with this strategy; however, it is easy for the Fed to act as if it is going to do something without actually committing to doing that thing. And so investors are fighting over whether we’re going to have multiple rate hikes over the next nine months…or rate cuts. In short, Powell’s “agility” is responsible for a lot of volatility in the market. So far in 2023, we’ve had two 25 basis point hikes, with a third scheduled for May.
4) The Fed… broke some banks. After nine consecutive increases, we saw two major banks collapse on the weekend of March 10 due to latent losses on their bond portfolios and liquidity problems. This gave Powell and other members of the Federal Reserve two problems to solve: rein in chronically high inflation and strengthen the banking system. In a way, the banking crisis should do some of the Fed’s job for them; if banks become more fussy about who they give credit to, it could be an additional anchor for the economy.
What happens afterwards?
Right now, it seems like no two analysts are in complete agreement on anything, but here are some of the big predictions for the rest of the year…
1) Another Fed hike in May…then cuts at the end of the year. This is based on the Fed’s target terminal rate of around 5.1%. Currently, we are at around 4.9%, so another 25 basis point increase will put us at the projected rate. However, Powell continued to clarify that they’re not married at that level, and we could see more ups (or a pause or even cuts) depending on what the data shows.
2) A credit crunch due to fallout from banking. One of the reasons the Fed only raised rates 25 basis points last March (instead of the 50 basis points everyone originally expected) was that the banks were going to the bulk of the work. Following the banking crisis, experts agree that most banks will start limiting who they lend to, making access to credit even more difficult. Like rate hikes, this will help slow the economy and calm inflation.
3) Prepare for some kind of recession. Depending on who you talk to, it may just be a technical recession where growth is contracting, but we’re not feeling the pain as deeply as in past recessions…or it may be a hard landing. While the labor market remained strong, manufacturing activity fell and the housing market weakened considerably. The yield curve has also inverted and the New York Fed’s recession model predicts a 54.5% chance of a recession in the United States over the next 12 months.
4) Higher quality companies will be rewarded. Although many experts say a recession seems inevitable at this point, investors need not be sidelined. Take this first trimester, for example. Anyone waiting to put their money to work missed out on a chance, even though the outlook for the start of the year looked bearish.
It will be interesting (dare I say, fun?) to look back on these forecasts three months from now and see where things stand. What kind of predictions are you making for this year?
Are you buying quality or is your portfolio risky? Do you think we will eventually see additional increases, or are you one of the many expecting a reduction later this year? I’m always happy to see what’s on your mind.
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All my wishes!
Chief Growth Strategist, StockNews
Editor, POWR Stocks Under $10 Newsletter
SPY shares closed at $409.19 on Friday, up $1.59 (+0.39%). Year-to-date, SPY has gained 7.41%, versus a % rise in the benchmark S&P 500 over the same period.
About the Author: Meredith Margrave
Meredith Margrave has been a renowned financial expert and market commentator for two decades. She is currently editor-in-chief of POWR Growth And POWR Stocks Under $10 newsletters. Learn more about Meredith’s journey, as well as links to her most recent articles.
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