MARKetS REPORT - 2023 1st Quarter
Dear Client,
Investors had lots to cheer by the end of the first 3 months of 2023 as stocks rallied, bond prices rose, interest rate hikes by central banks slowed and inflation cooled down again. It’s a promising start to 2023. But much like March Madness in NCAA college basketball, there were a few shocks along the way!
Equity markets dipped in February over concerns “hot” economic data coming in might mean Fed interest rates having to stay higher for longer. Then in mid-March there were headlines made as the U.S. regional banks Silicon Valley Bank and Signature Bank were forced to shut down. These closures dragged down banking stocks around the world. The fallout of this bank run spread overseas, affecting the ongoing operations at Swiss banking giant Credit Suisse (which was bought by their Swiss bank rival UBS). However, following a coordinated response by central banks to maintain market functionality, liquidity and protect deposits, Canadian, U.S. and global equities recovered to wrap up Q1 with impressive gains. The tech sector led the way, offsetting much of the negativity in the banking sector.
It was also a bright beginning to 2023 for bond markets as bond prices rose on more signs that inflation is easing. As a result there are now lower expectations for interest rate increases from the central banks in the coming year.
There were a number of market-friendly Canadian and U.S. economic indicators during the quarter. Job creation on both sides of the border continued to be resilient. Canadian retail sales rose and home sales slowed while U.S. GDP grew a respectable 2.7%. There was promising economic news overseas as well. Surveys of manufacturers, the services sector and consumer sentiment in the U.K. and Euro-zone revealed an improved outlook and an easing of past gridlock in supply chains. Economic activity is also picking up in China as it reopens for business after lifting its “zero-Covid policy” pandemic restrictions. Chinese manufacturing in particular moved back into expansionary territory, which global markets responded to positively.
The Canadian federal government released its 2023 annual budget at the end of March. Highlights included health and dental care spending, green initiatives, a grocery tax rebate. It also featured proposals to raise the alternative minimum tax rate and threshold and increase limits for some RESP withdrawals.
Inflation and interest rates
U.S. inflation cooled for the third consecutive quarter, from 7.1% to 6% as prices for goods and energy continued to stabilize. This was still higher than hoped due to food and housing costs remaining high, but the underlying details remain consistent with trending disinflation. The United States Federal Reserve Board raised its target interest rate by a smaller 25 basis points twice during the past 3 months, from 4.5% to 4.75% in February and to 5% in March. The Chair of the Federal Reserve, Jerome Powell, indicated the end of its tightening cycle is near. He told the public that a soft landing for the U.S. economy, as opposed to a recession, is still attainable. He also stressed the Fed would be prepared to increase rates further if tighter financial conditions do not effectively slow economic activity and lower inflation in the near term.
Here in Canada, inflation moderated as well, from 6.8% at the beginning to 5.2% at the end of the quarter, the largest deceleration since April 2020. According to Statistics Canada this was mainly due to lower gasoline prices although grocery and mortgage interest costs continued to rise. In January the Bank of Canada raised its benchmark rate by 0.25%, to 4.50%. Governor of the Bank of Canada, Tiff Macklem, indicated at the last press release (April 12th) that rate hikes would be on hold to assess the effects of hiking so far. He added, if needed, the bank would hike interest rates again to get inflation back to the 2% target.
Capital Markets in Q1
The S&P/TSX Composite Index ended the quarter up 3.7%, the S&P 500 Index was up 7%, the MSCI EAFE Index was up 4.5% and the MSCI World Index also ended the quarter up 7%.
Markets rose through January before dipping in February over concerns economic data pointed to a still too strong underlying economy which might prolong central bank rate hiking. Then in mid-March there was a scare to equity markets (and deposit holders) as U.S. regional banks Silicon Valley Bank and Signature Bank were shut down by federal regulators in the U.S. This had the effect of dragging down bank stock prices throughout North America. The fallout spread overseas, affecting an already tenuous Credit Suisse. They were bought out by their main competitor, Swiss banking giant UBS. Following a coordinated response by central banks to maintain market functionality, liquidity and guarantee deposits, Canadian, U.S. and global equities recovered to end Q1 strongly. The information technology and communication services sectors were the leading quarterly contributors, offsetting banking negativity, with the NASDAQ index in particular having its best quarter since Q2, 2020, rising approximately 17%. (Please Note: All index performance is in Canadian dollars.)
Despite the headwinds of depositor’s withdrawals after the failure of Silicon Valley Bank and Signature Bank, several major U.S. banks posted quarterly earnings which were overall quite strong. Canadian banks had another round of strong results too, largely driven by their trading businesses. It should be noted that the U.S. banking system is a lot different than the much more conservative Canadian banking system.
Like equities, bonds see-sawed through Q1. In January, bond yields fell on more signs inflation is easing. Then in February yields rose in negative correlation to equities, before falling again on lower expectations for how high the Fed would hike rates following the Silicon Valley Bank and Signature Bank closures.
An academic, Kazuo Ueda, was also named the new Governor of the Bank of Japan, potentially indicating a change in Japan’s near-zero rate policy, which could impact global bonds. He thinks the Bank of Japan should be creative with its monetary policy, and future decisions would hinge on the inflation outlook.
In addition to interest rate policy changes, the price of oil fell steadily through the quarter. A rise in oil with optimism over China reopening was countered by the March banking scare, Fed chair Powell stating the Fed would increase rates further if required and concerns about a potential U.S. economic slowdown. Other contributing factors to oil price declines included a slower than expected recovery in international travel as well as a continued Russian supply to world markets, despite western sanctions in place since the Ukraine invasion. Oil did rise about 9% in the last week of March, stemming from disruptions to Iraqi exports.
The loonie, dubbed a “petro-dollar” due to its close ties with the oil sector, strengthened against the greenback throughout March but for the entire quarter was virtually unchanged. Gold ended the quarter at $1969.46 US$ per oz., which put the price of this precious metal up 7.98% so far this year.
What we can expect now?
Thanks to a swift response from central banks the recent banking troubles have likely been contained. The probability of a global economic slowdown has risen due to tightening credit conditions, which should lead to decreased spending and lower prices. The interest rate increases over the last year have a delayed impact so are still gradually affecting the economy and monetary policy decisions. The likelihood of interest rates moving lower by the end of 2023 is increasing, potentially setting the stage for the next bull market.
Regardless of where we are in the market cycle, it’s important to take a disciplined approach to investing and stay focused on your long-term goals. This strategy helps you keep your emotions out of investing, typically buying high and selling low like many investors do. Ongoing monitoring and reviewing of your portfolio also ensures it remains on track. Diversifying investments reduces risk as well.
It should be noted that the best pension plans in the world not only just rely on publicly traded equities and bonds, but on alternative investments including private income, private equities, commodities, real estate and infrastructure to moderate volatility and provide steady returns. We should be looking at these alternatives for you if you are finding the current public markets too stressful.
And, if things have changed with you personally (a new job, a new address, a new kid, etc.) please call or email me with any changes and we can review your situation.
In Closing
Once again, thank you for your continued trust in me and my team for the opportunity to assist you in working toward your financial goals.
Should you have any questions regarding your portfolio, or wish to set up a meeting either in person, by phone or online via Microsoft Teams meeting, please do not hesitate to contact my office at 519-432-6744. My assistant Susan can be reached at extension 239 to book any appointments and I can be reached at extension 238.
Until we speak again, I hope you have a warm and wonderful spring.
All the best,
Mark McConnell, BA (Economics), DipBIS
Senior Investment Advisor, Branch Manager
Mandeville Private Client Inc.
640 Colborne Street
London, Ontario N6B 2V2
ph (519) 432-6744 ext. 238
cell (519) 859-6449
fax (519) 432-5967
Visit us at www.mapledene.ca
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