- April 4, 2023
-- Key takeaways:
A tug-of-war between financials and tech
- Markets wrapped up a volatile but positive first quarter as strength in tech was able to offset weakness in banks.
- Confidence has increased that the cyclical peak in bond yields is behind us. The bank turmoil likely pulled forward the end of the Fed's tightening campaign.
- History is mixed on whether a Fed pause can be enough to end bear markets. But similarities of the current bear with the one from the 1970s suggest that equities might not require aggressive rate cuts to bottom.
- Banking-contagion concerns have receded, though the coast is not yet clear. We'll monitor commercial real estate because we consider it an area of vulnerability, and we'll continue to look for a more sustainable rebound in equities in the second half of the year.
Sources: 1. Bloomberg
- While the bank turmoil led to a sharp pullback in shares of regional banks, large banks, and value-style investments more broadly, it was also a catalyst for the tech sector and other growth segments of the market to reassume stock-market leadership.
- The drop in short- and long-term yields partly reversed the valuation pressures that high-growth companies experienced last year. This in turn helped prop up the S&P 500, which managed to eke out a small gain in March, even after a 15% drop in large banks and a 22% drop in regional banks. Showcasing the tug-of-war, the tech-heavy Nasdaq 100 logged its best quarter since 2020, up now 22% from its December lows1.
- Small-cap stocks, which are more economically sensitive and carry a higher weight in financials, lagged. But balanced portfolios benefited from better fixed-income returns as bonds rose, regaining their diversification benefit against equity volatility.