Major markets, although volatile, showed their resilience during the first quarter of 2023, despite being rocked by shock waves that few analysts saw coming. Investors began the year feeling somewhat upbeat with inflation appearing to be coming under control with some betting that the Federal Reserve would switch from increasing rates to cutting them. But, the economic data started coming in hot causing both stocks and bonds to slide with the fear the Fed would continue to raise rates for a longer period of time.
The biggest shock to the system during the first quarter came in March when Silicon Valley Bank and Signature Bank both failed coupled with Credit Suisse Group coming to the brink of failure, causing sharp declines in bank stocks. The biggest U.S. banks scrambled to shore up another large bank, Republic Bank, in an effort to stem the growing panic from taking down more institutions. Overall, the banking sector has been under intense scrutiny by investors in a dramatic couple of weeks that saw the launch of a new backstop program by the Fed, hearings during the last week of March on Capitol Hill on what went wrong at Silicon Valley Bank and new regional-bank regulatory proposals from President Joe Biden. The S&P U.S. Broad Market Index posted an 18.9% decline for the Month of March, leaving it down by about 14% during the quarter.
As volatility hit the markets, bond prices climbed with the 10-year treasury falling to 3.491% from 3.826% at the end of 2022, making the biggest quarterly decline since 2020 as many sought the safety of treasuries after the bank failures during March. Recent projections show Fed officials expect the federal funds rate to rise to at least 5.1% from its current range of 4.75% to 5.00%, suggesting at least one more Federal Reserve interest rate increase with the expectation of holding that rate through year-end 2023.
The KBW Nasdaq Bank Index posted an 18.7% decrease during the first quarter of 2023 compared with the 5.3% rise in the fourth quarter of 2022. This index is now down by 33.9% over the past year and up by 25.3% over the past three-year period. By comparison, smaller banks posted similar returns during the first quarter of 2023, with the S&P U.S. SmallCap Bank index decreasing by 18.5% in the quarter with the index being down by 27.7% over the past year while posting a three-year rise of 30.1%. The S&P U.S. MidCap Bank index declined by 36.0% during the first quarter of 2023 compared to the decrease of 3.7% during the fourth quarter of 2022 leaving it down by 50.6% over the past year and up by 13.7% over the past three years. By comparison, the S&P 500 was up by 7.0% during the first quarter of 2023 leaving it down by 9.3% during the past year. The S&P 500 was up by approximately 59.0% during the past three-year period compared to the 25.3% rise for the KBW Nasdaq Bank Index and the 58.7% increase in the technology-heavy Nasdaq. The Nasdaq increased by 16.8% during the first quarter of 2023 and was down by 14.1% over the past year.