Tug of War

April 28, 2023


  • Global economic activity remains strong despite geopolitical shocks and policy tightening.
  • The US economy and job market are resilient, but rising unemployment claims and an inverted yield curve are concerning signs. Aggressive interest rate hikes have hurt certain sectors, such as real estate, and inflation remains too elevated.
  • Market expectations for Fed funds rates changed due to recent bank failures, with only one more rate 25 bps hike expected in May.
  • Technology, communication services, and consumer discretionary stocks have performed the best this year, but gains have come from a small number of stocks and breadth has been low.
  • Earnings season is ongoing, and while full-year earnings are expected to dip compared to last year, positive outcomes are still possible.

Spring has sprung, and peak wedding season is just around the corner. As wedding season heats up, couples everywhere are saying "I do" and hitting the dance floor to celebrate their nuptials. If you happen to attend a celebration this upcoming season, it’s inevitable that the familiar sound of the Cha Cha Slide will radiate through the speakers. Everybody knows the lyrics (maybe even the dance), but what may trip you up is when DJ Casper yells, “Reverse, Reverse.” Just like the lyrics to the song, the market has been experiencing quite a few reversals lately.

Economic Update

Global economic activity has continued to defy policy tightening and the multiple geopolitical shocks experienced thus far. The United States launched into Q2 with a surprisingly strong economy and consumption has been strong, but the tailwind from pent-up pandemic savings should dissipate later this year. The job market in the U.S. remains quite robust, with unemployment levels near historic lows. However, there are some worrying signs emerging from key economic indicators, such as the rising number of unemployment claims and an inverted yield curve.

As of 04/22/2023.

Aggressive interest rate hikes meant to combat inflation are hurting certain sectors of the economy, such as the real estate market, but inflation remains too high for the Federal Reserve’s liking. The Fed rate hike cycle that began over a year ago has been extraordinary: 475 bps of Fed rate hikes within four quarters is the most severe since the early 1980s.

Despite significant rate hikes to date, central bank tightening is yet to have its desired impact on inflation. Market projections for Fed funds rates indicated that the Federal Reserve was heading towards a 5.50% terminal rate with no further rate hikes through 2023. Meanwhile, the recent collapse of several banks has caused significant upheaval in the financial sector. As a result, market expectations have changed, and investors now only anticipate one additional 25 basis points rate hike, which is expected to occur in May.

The central bank now faces a serious dilemma. Will they prioritize price stability or financial stability? We believe the answer to this tug of war should reveal itself throughout the rest of the year.


Global stocks, as represented by the MSCI ACWI NR Index, rose 7.3% during the first quarter of 2023, with U.S. stocks (S&P 500 Total Return Index) jumping 7.5% and developed international (MSCI EAFE Net Total Return Index) stocks up 8.5%. Diving deeper into the U.S. and international markets, much of the strength came from mega and large cap stocks, while value stocks trailed growth stocks.

With Q1 in the books, Q2 has continued many of the trends laid out during the start of the year. This is a large reversal from what worked in 2022. As a reminder, the best performing sub-asset classes within equities during 2022 were small value stocks and international value stocks.

From a sector stand point, technology, communication services, and consumer discretionary stocks continue to dominate. Don’t be fooled though. Most all of the gains have come from a handful of stocks, and breadth—defined as the percentage of stocks outperforming on a three-month rolling basis—has been the lowest on record. This can be illustrated another way, with the equal-weighted S&P 500 (SPW) lagging the cap-weighted S&P 500 Index by a substantial amount.

As of 04/17/2023.

Moreover, as a result of SVB's bankruptcy, the regional bank-heavy Russell 2000 Index has underperformed year to date. As of April 26th, the year-to-date underperformance was more than 4%, putting the overall return for small cap companies into negative territory for the year.

Fixed Income

In 2022, U.S. bonds experienced one of the most significant declines in American history. However, they made a strong start in 2023, even managing to end the first quarter with modest gains despite a turbulent few months.

Initially, concerns about inflation and the possibility of aggressive interest rate hikes caused bond yields to rise sharply. This caused 2-year Treasury yields to hit a high of 5.1% in March, a level not seen since 2007. Nevertheless, these worries were soon replaced by concerns about financial stability and economic growth, especially as many regional banks in the U.S. began to struggle, causing yields to fall rapidly. As a result, U.S. intermediate bonds, as represented by the Bloomberg U.S. Aggregate Bond Index, returned 3.0%, while inflation-protected Treasury bonds (Bloomberg US Treasury Inflation Notes Index) increased 3.3% in the first quarter. Bonds have once again served as a stabilizing force in troubled times.

On Deck

Earnings season is in full swing across the United States and worldwide financial markets, and thus far, the results have been slightly better than predicted. While earnings for the full year are expected to dip compared to last year, history shows that the stock market might still have a positive outcome. The earnings result compared to market expectations can create major swings in either direction for the market, and if earnings diverge wildly from forecasts in the wrong direction, additional downward volatility is probably in the cards heading forward.

Important Disclaimers and Disclosures