Earnings Drive Rebound
It was a very busy week of earnings reports, but none more important than those from the Big Tech names. After two days of sharp losses on revived regional banking fears and otherwise lackluster earnings results, stocks rallied powerfully on a succession of positive earnings surprises from several mega-cap companies.
Also aiding the sentiment was last week’s first quarter Gross Domestic Product (GDP) report. Though the report showed muted economic growth that fell short of expectations, investors were encouraged by strong consumer spending.
Slowing Growth
In a sign that higher rates are slowing economic growth, first-quarter GDP slowed to a 1.1% annualized growth rate as healthy consumer spending helped offset a decline in business investment and a slowdown in nonresidential investment.
Economists had expected first-quarter GDP growth to come in at 2%. The business inventory investment slowdown reduced the headline GDP number by 2.26%.1
The initial estimate of GDP also reported some disappointing inflation news as the quarter-over-quarter Personal Consumption Expenditures Price Index, the Fed’s preferred inflation measure, rose 4.2%, which was higher than the 3.7% forecast.2
Recessions and Bond Performance
In 2022, the statement was made that the 60/40 portfolio is dead as bonds did not act as a ballast to stocks like they normally do. However, it is GTS Financial's view that bonds will prove their worth in 2023-2024 as a recession looms. On average since 1972, Short-, Intermediate-, and Long-term investment grade bonds returned 6.4%+ during recessions, beating Money Markets (3.9%), High Yield (0.3%), and U.S. stocks (-2.1%). Below is an illustration of bonds and historical recessionary environments.
Footnotes and Sources
1. CNBC, April 27, 2023
2. CNBC, April 27, 2023