Given that big picture, what mattered this quarter? I would call out three things.
First, interest rates peaked and pulled back. Interest rates spiked at the start of the year and again at the beginning of March on fears about the Fed. But in each case, they pulled back, just as they did toward the end of last year. With the Fed signaling the end of the rate hiking in the next couple of meetings, with the banking crisis generating significant financial tightening over the next several months, and with the recession supposedly coming, that move makes sense.
But it also represents a significant shift in the economic environment and investor perceptions. Rising rates generate caution across the board; stable (or even declining) rates allow businesses to plan and invest. Stable rates mean stock valuations are more stable, allowing growing earnings to increase stock prices and explaining at least part of the positive start to the year. This quarter saw a shift from a negative backdrop to at least a neutral one.
The second thing that mattered is the recession that didn’t happen. You could add “yet” to that, and there are signs that a recession is likely later this year. But the continued strength in a wide range of economic indicators—job growth and consumer confidence at the head of the list—has been noteworthy this quarter. That outperformance against expectations matters because it raises the chances it will continue and, again, has started to turn a negative environment to a positive one.
The third and last thing that has happened has been politics. Again, we started the year with multiple worries, including the Ukraine war, the Chinese Covid-19 shutdown, and the debt ceiling confrontation here in the U.S. Two of those issues are still with us, and the Chinese Covid-19 worry has been replaced with a China/U.S. confrontation. But markets have accommodated those worries. Even the pending presidential election, with all the theater associated with that, hasn’t shaken markets. Overall, again, we end the quarter in a better place—at least emotionally.
So, what mattered this quarter was really what didn’t happen. Interest rates didn’t continue to march upward. The economy didn’t fall into a recession. And politics did not derail either the economy or markets. As I mentioned the other day, despite the headlines, what has mattered is that the dogs simply are not barking about the problems.
That can change, of course. Many of those problems are still out there and could come back and bite us. But the real thing that mattered this quarter is that the U.S. worker and consumer continued to do well, to work more, to make more money, to feel confident, and to spend. As long as that positive news continues, it will be the dominant factor for everything else. Right now? The signs are still good.