Looking Back on the First Quarter
Is it just me or did this quarter feel like a lifetime? As investors, we naturally have a recency bias. Since the last couple weeks of March ended on a bullish note, we might think that it was a pretty good quarter overall. I suppose compared to the last couple of years of trading it was. The S&P 500 rose about 7.0% and the NASDAQ soared higher by 16.77% during the three-month period. It was the best quarter for the NASDAQ since 2020.
Lost in these gains is a near collapse of the global banking system. A couple of these banks went insolvent overnight just a couple of weeks ago. With everyone and their dog screaming that the bull market is back, I think it is important to take a pause and not overreact to a couple of weeks of strong trading.
Inflation is Still the Key
Part of the reason why the markets have been in a better mood is that the inflation numbers are continuing to fall in the US economy. On Friday, we saw that the core PCE index rose at a slower rate than expected. Unemployment numbers are also rising, which ordinarily isn’t a good thing, but it is a necessary step toward lowering inflation.
It is easy to get excited since the end of the bear market seems to be drawing near. We also need to remember that just because a bear market is coming to an end, it doesn’t mean that stocks will instantly return to all-time highs. In fact, with a recession still in the cards and other global economies still trying to rein in inflation, we could see a period of sideways trading within range for the rest of the year.
As bullish long-term investors, this isn’t a bad thing. After the banking crisis, investors poured back into tech stocks, which explains the NASDAQ’s stellar quarter. Semiconductor stocks surged higher, notably NVIDIA (NASDAQ: NVDA) which all of FinTwit seems to be short on. But also keep in mind that during the worst of the bear market, tech stocks took a much harder beating than other sectors. It was a true tech meltdown, and their valuations are just starting to catch up to the rest of the market.
What is in Store for the Rest of 2023?
The truth is, I have no idea. Nobody does. Permabears will tell you we’re in for a major crash in the coming weeks, while permabulls will tell you it is up only from here. The truth often lies somewhere in the middle. I’m not getting too excited and after such a strong run from stocks, it is always healthy to take some profits.
I think there is a good chance that things settle down in April and tech stocks cool off. Remember, first-quarter earnings season is right around the corner and these reports can often be a reminder of the true health of a business. I’m not ready to announce that the bull market is back. If I have learned anything these past couple of years it is to not get ahead of myself and jump to conclusions. I do think that the worst of the bear market is over though, but I guess we’ll check back in three months to see if I was right.
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