March 2023 Market Update: Inflation, Interest Rates, and Economic Outlook
As we moved through the first quarter of 2023, one question continued to dominate conversations with clients: Are we nearing the end of this bear market, or is there still more volatility ahead?
In this market update, we share our perspective on the economy, inflation, interest rates, recent banking sector developments, and what we believe investors should be watching during the first half of the year.
Why We Continue to Watch Economic Growth and Inflation
One of the tools we use to help evaluate the economic landscape is the Quad Framework developed by Hedgeye. The framework tracks changes in economic growth, inflation, and policy trends on a quarter-over-quarter basis. While no model is perfect, it can help us identify the types of market environments that have historically been associated with higher levels of risk and volatility.
Based on the data we reviewed in this update, the economy continued to exhibit characteristics consistent with a slower growth environment. Historically, these conditions have often been accompanied by increased stock market volatility and more challenging investment conditions.
Understanding Bear Markets and Market Volatility
Bear markets are never comfortable, but they are also not uncommon. A bear market is generally defined as a decline of 20% or more from a market peak, and while every market cycle is different, periods of elevated volatility have historically been a normal part of investing.
The market decline that began after the November 2021 peak had many of the characteristics of a typical bear market. While investors naturally focus on short-term uncertainty, we believe it is important to remember that market cycles are a normal part of long-term wealth building.
Banking Sector Concerns and the Impact of Higher Interest Rates
One of the most significant developments during the quarter was the failure of Silicon Valley Bank, Signature Bank, and Silvergate Bank. These events raised understandable concerns about the stability of the banking sector and the broader economy.
While we did not view these failures as evidence of a systemic collapse, they served as a reminder that higher interest rates and tighter monetary policy often create stress in areas of the economy that previously benefited from low borrowing costs and abundant liquidity. This includes certain technology companies, venture-backed businesses, commercial real estate, and highly leveraged organizations.
What We Believe Matters Most
When markets become volatile, headlines tend to amplify fear and uncertainty. Our focus remains on evaluating economic data, inflation trends, interest rate policy, and long-term opportunities rather than reacting emotionally to short-term events.
While we expect volatility to remain elevated, we continue to believe that maintaining discipline and perspective is critical during periods of market uncertainty.
Disclosures
This is being provided solely for informational and illustrative purposes, is not an offer to sell or a solicitation of an offer to buy any securities. The factual information given herein is taken from sources that we believe to be reliable, but is not guaranteed as to accuracy or completeness. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis or trading strategies that differ from the opinions expressed here. For more information about Janney, please see Janney's Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.
