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Posted by Greg Taylor on Apr 3rd, 2023

Could March Market Be the Calm Before the Storm?

Equity markets started 2023 with a bang. The technology stocks that suffered over the past year, as bond yields increased and pressured multiples, were able to lead the charge higher as investors began to anticipate the peak in central bank tightening. For most assets, the returns we have seen over the first quarter have been a mirror image of what occurred last year.

Value and cyclical stocks, which proved to be a safe haven last year, have lagged behind their growth counterparts. And now everyone is having the same debate: Was this simply a rebound from oversold levels for technology or is this the start of a new bull market?

Value and cyclical stocks, which proved to be a safe haven last year, have lagged their growth counterparts.

It’s probably too soon to signal the all-clear. The measure of calm the markets experienced to end March seems premature. Signals of a pause from rate hikes are happening as much because of stress in the regional banking system as the result of a victory over inflation. That isn’t necessarily a good thing.

The effects of the second- and third-largest bank collapse in American history have yet to be fully understood. Yes — bank management teams were at fault for how they positioned their balance sheets, but this is also a direct result of the dramatic pace of rate tightening that occurred last year.

Still, it’s unlikely that banking is the only sector that is under stress from these rate hikes. We will soon know more as we head into another highly anticipated earnings season. Markets rallied during the past few earnings releases as companies were able to meet expectations thanks to their cost-cutting efforts. The question remains: Can this happen again, or will we see more signs of stress that will lead us into a recession?

As a contrarian, the fact that it seems everyone is calling for a recession and expecting a pullback could be taken as a bullish signal. After all, markets tend to do what makes most people wrong. Many may be looking over the earnings recession valley in areas such as technology, but that seems too easy. Complacency can be dangerous.

Central bankers are getting closer to wrapping up their aggressive pattern of rate hikes, but they still need to see more evidence that inflation is receding before we know for sure they are finished. As economic measures begin to cool, a worst-case scenario of stagflation remains a risk, which will keep a bid to real assets such as gold.

After a year where not much went well, it’s refreshing to see a positive start to markets in 2023. But risk remains. Following the stress in the banking system, this earnings season should provide clarity surrounding the impacts of the Fed tightening. And while rate hikes may be nearing an end, their effects are still working through the system, and their impact is not fully known. Together, these factors will help determine if the optimism of March was warranted or premature.

— Greg Taylor is the Chief Investment Officer at Purpose Investments

Sources: Charts are sourced to Bloomberg L.P.

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Greg Taylor, CFA

Greg Taylor is the Chief Investment Officer of Purpose Investments. A data-driven manager with a focus on managing risk through active-trading strategies, Greg specializes in finding and exploiting pockets of volatility in the market to drive returns. He spent more than 15 years managing pension and mutual fund assets at Aurion Capital Management. He also held a role of senior portfolio manager at Front Street Capital and LOGiQ Asset Management before coming to Purpose Investments.

Greg serves on the investment committee for the MS Society of Canada and advises the finance program’s portfolio management course at Bishop’s University. He has won numerous Brendan Wood International “TopGun” awards and is a regular host and guest on BNN Bloomberg and Toronto’s all-news radio station, 680News. Greg is a CFA Charterholder and has a BBA in Finance from Bishop’s University.