Edited for clarity and brevity by Gleba & Associates
Over the first quarter, inflationary pressures decelerated and global growth remained mixed.
- The global business cycle is less synchronized and faces multiple crosswinds.
- The U.S. is in the late-cycle expansion phase. Banking stress adds to the elevated odds of a recession in the coming quarters.
- China’s post-COVID reopening and policy stimulus support a continued recovery, but the magnitude and length remain uncertain.
- The rate of inflation is slowing, but persistent pressures imply greater economic slowing may be necessary to bring it down sustainably.
- The Fed is likely nearing the end of its hiking cycle, but global monetary tightening is dampening liquidity and adding to growth risks.
Asset prices fluctuated considerably during the first quarter but ended up posting their second consecutive quarter of widespread gains. A decline in U.S. Treasury yields helped boost both fixed income and equity returns, with gold, non-U.S. developed-market equities, and large cap growth stocks leading the way. Longer maturity bond categories posted the best fixed income gains, while commodity prices fell.
The MOVE Index, a measure of volatility in Treasury markets, spiked during the first quarter to its highest level on record outside of the global financial crisis of 2008-2009. Banking sector turmoil and dramatic fluctuations in investor views of the outlook for inflation and monetary policy contributed to the volatility. In contrast, measures of equity-market volatility, such as the VIX index, remained relatively range-bound.
Aggressive monetary tightening by the world’s major central banks continued during the first quarter, bringing global short-term interest rates to their highest levels in more than a decade. Most investors expect the pace of rate hikes to slow and eventually stop over the next two quarters, but the impact of the abrupt departure from the ultra-low rates era may weight on financial conditions in the quarters to come.
Over the past 20 years, subdued U.S. core inflation averaged about 2% and facilitated an environment of negative correlations between U.S. stock and Treasury bonds, leading to strong portfolio diversification. Since 2021, the backdrop has been more akin to prior periods of high inflation and positive stock-bond correlations, where the performance of stocks and bonds moved in the same direction.
Historically, most bear markets for stocks (declines of 20% or more) coincide with recessionary contractions in the economy and corporate profits. Sometimes bear markets occur without a recession, typically with positive earnings growth and less stock-price declines. Since the start of 2022, stock prices and earning forecasts have been somewhere in the range between historical recession and non-recession bear markets.
Nominal 10-year Treasury bond yields declined during the first quarter, driven by a decrease in real yields – the inflation-adjusted cost of borrowing. However, both nominal and real yields remained at the upper end of their ranges over the past decade, supported by the Fed’s monetary tightening. Inflation expectations did not change much by the end of the first quarter and have remained relatively steady over the past few quarters.
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Information from: https://institutional.fidelity.com/app/literature/item/9880898.html