Equities look past crisis while fixed income sends warning signal
There was plenty of reason to expect a much weaker market given everything that happened throughout March, but somehow investors were able to look past bank failures, rate hikes, and slashed earning estimates with a surprising level of optimism. The S&P was able to end the month in the green up 1.57% and 7.03% for the quarter. The Nasdaq was also up 4.56% in March and 16% for the quarter, its best quarter since 2020. The TSX was dragged down by lower energy prices, falling -2.37% in March, but still up 3.66% for the quarter. The fixed income market was extremely volatile throughout March as the treasure markets saw erratic swings, with 2-year yields regularly whipsawing more than 20-basis points intra-day. The 2-year and 10-year yields fell sharply as investors continue to pile onto the safety of U.S. Treasuries and Money Market funds.
The NEI perspective
Banking crisis raises recession odds as regulators get busy in tightening up regulations, the more immediate fallout of the banking crisis will likely be tightening of lending standards. If tighter lending standards do materialize, it will have a tightening effect on financial conditions, not unlike the effect of rate hikes. This increases the likelihood of the economy slipping into recession later this year.
Surprising economic strength is a key takeaway from the recent economic data releases in North America, Europe, and Emerging Markets. While they continue to surprise to the upside and show that economies are stronger and more resilient than forecasts assume, the sustainability of the resilience is debatable.
Earnings estimates cut again as many analysts continue to drop their earnings estimates for the S&P 500 companies in 2023 and 2024. S&P 500 earnings are now expected to be flat for 2023, down from 10% growth last summer, and could fall further as current valuations are still relatively high compared to previous cycles.