Q1 | 23

First Quarter Newsletter 2023

Beginning in 2019, and then running full-bore in 2020 and most of 2021, Central Banks drove enormous monetary growth, contributing to a substantial spike in inflation. They are now reversing that increase to bring inflation back to a more manageable 2% target rate. The process of normalizing interest rates has been a bumpy ride, especially in 2022. However, the hiking cycle and the U.S. regional banking turmoil has had a minimal effect on both stock and bond prices in 2023. Equities and bonds in the first quarter are up and have clawed back some of last year’s decline.
During 2022, the U.S. Federal Reserve hiked interest rates 7 times. The trend continued into 2023 with another 2 quarter-point hikes. Even before the collapse of Silicon Valley Bank, investor sentiment was improving as market participants sensed that Central Bankers were nearing the end of the rate tightening cycle. Given the banking turmoil, the market now expects tighter lending conditions to slow the economy, increasing the odds that the rate hiking cycle will end, and fueling the possibility that rates may eventually be cut.
In the first quarter of 2023, the S&P 500 rose 7.5% and the Canadian stock market climbed 4.6%. Leadership in Q1 was the opposite of 2022. Technology was the best performing sector and Energy lagged. Although the fixed income markets were volatile in Q1, both Canadian and U.S. bonds posted positive returns. In Q1, the Canadian Bond Universe was up 2.9% and the U.S. 10-year yield fell from 3.7% to 3.4%. Currencies were stable in Q1. The Canadian dollar gained 0.3% to the U.S. dollar.