On this episode of KayneCast, Jordan Greenhouse, Managing Director for Kayne Anderson Rudnick and Doug Foreman, CFA, Chief Investment Officer review market events for Q1 2023.

A Wild Q1 2023 Market Ride 

Foreman notes Q1 2023 began with cause for optimism as January saw the S&P 500 increase by more than seven percent and bonds rallied by almost three percent. While concerns of a recession remained, the prevalent view was that any slowdown would be shallow or mild with limited impact on the stock market. As such, January saw many investors reporting meaningful returns across the board, and hopes were high for a continuation of strong performance during Q1.

Unfortunately, February was less favorable, with signs of a slowing economy and higher-than-expected inflation. The Fed announced plans to extend higher interest rates for a longer period, resulting in a market slow-down and a partial loss of the January rally. Still, most investors thought it would take something unexpected to seriously threaten the markets’ recovery, even if a soft landing was anticipated. That unexpected event, as it turned out, would develop in March.

The 2023 March Banking Crisis 

The collapse of Silicon Valley Bank (SVB) in early March, followed quickly by the collapse of Signature Bank (SBNY), created serious concerns about systemic issues within the banking system and a deeper-than-expected recession. With the markets watching two banks collapse in a matter of days investors grew understandably concerned about the possibility of broader contagion within the financial sector.

Market response was predictable, with a flight to quality as investors began to discount a hard landing. However, swift repositioning of SVB and SBNY assets into larger institutions helped quell market concerns, as did backstops and guarantees from the FDIC. Still, the crisis rattled the market heading into Q2 2023.

Stock Market Outlook for 2023 

Foreman described Q1 2023 as choppy and difficult, noting that it felt like the market experienced the impact of “three years in three months.” Still, he believes there is cause for cautious optimism. While the March banking crisis shook the markets, Foreman does not think the collapse of SVB and SBNY is indicative of larger issues within the banking system. Foreman notes that SVB’s deposits grew rapidly within the previous two years, creating interest rate risks not seen in other banks.

Foreman also states that events like the SVB collapse have historically signaled the end of interest rate cycles, causing a decline or pivot to lower rates, and he believes that once the Fed sees improvement in inflation data, rates should drop, barring a significant external shock.

As for recession risk, Foreman acknowledges the possibility of a hard landing is now slightly higher, but notes deep recessions typically occur when the market and businesses expect high demand and returns. Foreman continues to believe that investors should stay focused on long-term objectives and not worry about short-term events.

For more insights, read our 1Q 2023 Commentary or subscribe to Kaynecast where we provide the latest updates on our investment strategies.