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Market and Economic Review 7 April 2023

The major benchmarks were mostly lower over a holiday-shortened week, trading was light and choppy. U.S. markets were closed on Friday, along with most of the other markets in the Americas, in observance of the Good Friday holiday, while Passover started on Wednesday evening. Investors took a pause following the previous week’s quarter-end “window dressing,” in which some institutional investors adjusted their holdings in advance of their quarterly public disclosure. Last week investors favored "defensive" trading, with Treasury yields falling and sectors like healthcare, utilities, and staples gaining ground. With the start of earnings season just around the corner, the major U.S. stock indexes didn’t make any big movements during a holiday-shortened trading week that concluded on Thursday, prior to Friday's monthly jobs report. The S&P 500 slipped -0.1%, the NASDAQ fell almost -1.1%, and the Dow added approximately +0.7%. U.S. small caps trailed their large-cap peers as financial system continued to put pressure on unfavored smaller companies. A small-cap benchmark, the Russell 2000 Index, fell around 2.6% for the week. Since a recent high on February 2, the index has declined more than 12.0%.

The price of U.S. crude oil on Monday surged more than 6%, its largest single-day gain since March 2022. Energy shares traded higher as the price of WTI rose above $80 per barrel after Saudi Arabia and other leading members of the OPEC+ consortium of oil-producing nations announced plans to cut production. The price of gold extended its recent rise, moving above the $2,000-per-ounce threshold on Tuesday and trading as high as $2,037 on Thursday. The price has increased about 12% since a recent low on March 8.

With markets closed on Friday, investors were unable to react to the Labor Department’s closely watched nonfarm payrolls report for March, but several other important economic releases appeared have an impact on the markets. On Monday, the Institute for Supply Management’s (ISM’s) gauge of March factory activity fell back to a nearly three-year low, reversing a modest uptick in February. The ISM’s services sector gauge, released two days later, indicated that the services sector was still expanding, but at a significantly slower-than-expected pace. Nonfarm payrolls rose 236k in March, exceeding consensus expectations for the twelfth straight month on continued strength across the leisure, healthcare, and business services sectors. Revisions were slightly negative and industry breadth was the third weakest since the pandemic lockdowns. Average hourly earnings increased by 0.27% month-over-month in March—slightly below expectations. Data over the last week suggesting that the economy might be slowing down.

The Atlanta Fed's GDPNow indicator for Q1 Gross Domestic Product (GDP) lowered yesterday to 1.5%. That's down from above 3% just two weeks ago. The new estimate, which reflects recent soft data, is now closer to Wall Street analysts’ estimates, though some analysts predict that GDP might decline in Q1. The official first estimate from the government is due later this month. Softer GDP growth often reflects less demand from businesses and consumers, meaning a possible blow to corporate earnings.

According to analysts the most likely scenario is for a mild recession perhaps starting in mid-2023. The recent set of economic data seems to confirm this view, and a softening labor market is often one of the later indicators to confirm it. An economic slowdown should not be ignored, and near-term risks remain elevated. But we also believe that markets have acknowledged some of the recession. Perhaps the good news for balanced investors is that the bond markets this year have performed well, as yields have come down more recently and as investors seek more safe-haven assets. We would expect bonds to continue to play this diversification role in the year ahead, particularly during periods of equity-market volatility. The investment community is anxious to hear 1Q corporate earnings releases starting with the major banks next Friday. As of Friday, analysts surveyed by FactSet were expecting companies in the S&P 500 to post average earnings decrease of 6.8% compared with the same period a year earlier—the biggest earnings decline since the second quarter of 2020. As we enter the second quarter of 2023, the strength in the market this year so far has been impressive. The S&P 500 is up about 6.5% higher, while the investment-grade bond market is up a healthy 4.5%. Analysts are caution investors and remind them, that recent gains in stocks were largely driven by valuation expansion, as price-to-earnings ratios climbed higher. Meanwhile, earnings-growth expectations during this period have moved lower. Analyst forecasts now indicate that S&P 500 earnings growth will be less than 1.0% year-over-year, compared with a 5.0% estimate at the beginning of the year.

Equity and bond markets will continue experiencing volatility until there’s a meaningful decrease in inflation, and the “data-dependent” Fed eases its stand on the rate hikes policy. Once again, we would like to iterate our defensive position, and we’ll continue to look for opportunities to upgrade portfolios during market weakness. Within equities, we continue to favor U.S. Large Cap exposure. We’ve recently become more constructive on Developed equities, mainly Europe as the energy recession wasn’t as severe as anticipated. In the United States, large-cap equities provide an attractive mix of quality, yield, and value. For fixed income, we remain defensive in our credit positioning, with at benchmark duration, and higher in credit quality.

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