Q1 2023 in review

Canadian equities produced a solid gain in the first quarter. The year began on a positive note, with risk assets benefiting from optimism that central banks were nearly finished raising interest rates. The backdrop became less favorable as the quarter progressed, with persistent inflation fueling concerns that the U.S. Federal Reserve would need to continue tightening policy. A strong rally in the final week of March that moved stocks back into positive territory for the full quarter. Still, Canada lagged its developed-market peers mainly due to weak relative performance for energy stocks.

The U.S. stock market rallied this quarter, buoyed early on by signs that inflation was abating and hope the Federal Reserve (the Fed) would curtail its interest rate hikes. However, stronger-than-expected economic data soon stirred worries that the rate increases would continue, pressuring returns. In mid-March, the unexpected collapse of two U.S. regional banks caused added volatility. The banking problems quickly appeared contained, though, and the market resumed its climb. Throughout the quarter, the Fed continued raising its target overnight interest rate. Against this backdrop, large-cap stocks outpaced small-cap stocks, and growth significantly outperformed value. Within the Standard & Poor’s 500 Index, the Information Technology, Communication Services and Consumer Discretionary sectors stood out, while the Energy, Health Care, Utilities and Financials sectors were laggards.

Global equities posted a mid- single-digit return in the first quarter. Stocks nevertheless finished in positive territory, highlighted by double-digit gains for the core European markets of France and Germany. The Asia/Pacific markets advanced as a group, with New Zealand leading the way. The United States also performed well on the strength of a recovery in mega-cap technology stocks, but Canada lagged amid persistent softness in oil prices.

Global bonds advanced in the first quarter in an environment of heightened volatility. Fluctuating economic and inflation expectations buffeted global fixed-income markets in January and February. However, bonds rallied worldwide in March as a series of liquidity crises hit several U.S. banks and one in Europe, leading to the collapse of three banks. Governments responded quickly to take the banks into receivership and implement other measures to prevent further liquidity issues. Nonetheless, concerns about the turmoil spreading across the global banking system led to a flight to quality in the global financial markets, which boosted demand for bonds. For the quarter, bond yields declined broadly around the world, with intermediate-term bond yields falling the most. Short-term bond yields were buffeted by continued interest rate increases from some of the world’s central banks, including the U.S. Federal Reserve and the European Central Bank. Bond market performance was similar across most regions of the globe, while sector performance was led by sovereign government bonds and other higher-quality securities, which benefited the most from the flight to quality.