Q1 2023 Market Commentary
By Edward Miller, CFA®, CMT®
Following the worst year for US stocks since 2008, and the worst year for US bonds on record, 2023 has started off on an optimistic note with both stocks and bonds posting positive 1Q returns. The S&P 500 was up 7.5% and the Bloomberg Barclays US Aggregate Bond Index rose 3% in the quarter. Even non-US equities, which have underperformed US equities for more than ten years, participated in the gains as the MSCI All-Country World ex-USA Index returned an impressive 7% in the 1Q.
Notably, the major asset class that suffered negative returns in the 1Q was the best performing major asset class last year: commodities. The Bloomberg Commodity Index fell by -5.4% in the quarter, a decline primarily driven by the retreat in crude oil prices. Although the relatively high rate of inflation continues to be a key concern for investors, there are indications that pricing pressures are easing, as reflected by the drop in oil prices.
The 1Q could be characterized as a performance reversion quarter as many asset classes that did very well last year underperformed in the 1Q (such as commodities), and vice versa. In fact, the three worst performing equity sectors last year were Consumer Discretionary, Communication Services and Technology, and those three sectors were the best performing sectors in the 1Q. The new year saw investors become much more hopeful that inflation would continue to subside, allowing for the Fed to eventually halt further rate hikes, and higher beta stocks in these three sectors benefited from this rosy view.
In addition to a reversal of 2022 performance, the 1Q was also characterized by narrow leadership in many cap-weighted indices. For example, although the S&P 500 was up 7.5% in the quarter, 59% of the Index’s 1Q return was attributed to just four stocks, as shown in the following exhibit.