Stocks Rally in March and First Quarter of 2023 After Fed Slows Inflation: Tech Stocks Lead the Way

Stocks rallied on Friday, marking a strong end to the first quarter of the year after weeks of market turmoil. The S&P 500 rose 1.4%, capping off a 3.5% gain for the month and securing a second consecutive winning quarter. The Dow Jones Industrial Average rose 1.3% and the Nasdaq composite climbed 1.7%. The Nasdaq’s gain of 16.8% for the quarter was its best since the surge in the spring of 2020 following the coronavirus-induced crash.

The gains were attributed to a report showing that inflation across the US slowed in February, though it still remained high relative to history. A continued slowdown could give the Federal Reserve more flexibility in its decision-making around interest rates. The threat of higher interest rates has been behind the stock market’s struggles since early 2022, as high rates can undercut inflation but slow the economy and drag down prices for stocks and other investments.

The market had earlier been worried about stubbornly high inflation and the possibility that the Federal Reserve would have to keep rates higher for longer. This caused some instability in the banking industry, which led to depositors rushing to pull their money out of Silicon Valley Bank and Signature Bank, resulting in the second- and third-largest US bank failures in history.

However, the pressure on the industry has since been mitigated by forceful actions by regulators, and traders have even built bets that the banking system’s troubles will force the Fed to stop hiking rates soon and possibly begin cutting rates later in the year. This has helped Big Tech stocks in particular, as high-growth stocks are seen as the biggest beneficiaries of lower rates, propping up the S&P 500, where Big Tech stocks play an outsized role because of their massive size. Apple, Microsoft, and Google’s parent Alphabet each posted double-digit gains for March.

While expectations for rate cuts are seen as premature by some professional investors, a continued slowdown in inflation could give the Fed more leeway in its decision-making. However, the Fed has hinted that it envisions raising rates one more time before keeping them steady throughout the year. The banking industry’s troubles could also act like hikes to interest rates if they cause banks to pull back on lending, which could stifle hiring and growth for the economy.

The drastically changing expectations for what the Fed will do have caused historic-sized moves for Treasury yields in the bond market. The yield on the two-year Treasury zoomed through particularly rattling moves, sitting above 5% at its highest level since 2007 earlier this month before quickly plunging below 3.60% as bets built for the Fed to ease up.

Overall, markets abroad also saw modest gains, with stocks in Europe and much of Asia rising after reports showed that inflation in the Eurozone slowed to the slowest level in a year, and China’s factory activity was stronger in March than expected.