The stock market's performance in the first quarter came as a surprise to many investors, with the Nasdaq posting a bull market-sized rebound. Is it just a melt up, a move in stocks lacking a strong economic underpinning?
Traders like what they see in the market history, with the S&P 500 posting huge years after first quarter starts that are this strong. A Federal Reserve judged to be near the end of its rate-hiking cycle has helped change the narrative on stocks, too — though there have been multiple false starts during what's been a period of heightened volatility in equities since the Fed's hawkish course started over a year ago.
Stocks failed to extend a four-day winning streak on Tuesday after new labor market data raised fears that the economy may be slowing too much for comfort. Under the hood, the recent big gains for the broader market index mostly came from a few big tech stocks, including Apple and Microsoft which both posted quarterly gains of 20%-plus, and which dominate the market-weighted approach of the S&P 500 index. Bets that the Fed may cut rates by the end of the year, meanwhile, have brought out both glass half-full and half-empty debate— soft landing that lets the central bank ease up, or more serious recession that forces the Fed to abruptly reverse course.
Chief financial officers at large corporations are still in the half-empty camp, according to a new quarterly survey of CNBC CFO Council members — "still" being the operative word, as little changed in the CFO outlook quarter over quarter in spite of the market's rebound and hints from the Fed that its pressure may soon abate.
CFOs, by the nature of their position, tend to be focused on risks and less likely to go out on a limb with their predictions as a result of it. The quarterly CNBC CFO Council survey is a sampling of the views of chief financial officers at corporations across the economy, with this quarter's survey including responses from 30 CFOs gathered between March 17-March 28.
Last quarter, more than half of CFOs said it was more likely the Dow Jones Industrial Average fell back below 30,000 before reaching a new high. Even fewer CFOs this quarter rate the chances of a new high in the Dow (under 15%) as being more likely than a fall back below 30,000 (57%) of CFOs. There was elevated uncertainty within this C-suite group versus the prior quarterly survey, with nearly one-third saying they don't have conviction about the next trend in stocks. Â
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A few more CFOs did become believers in a soft-landing scenario compared to last quarter, but the vast majority (over 80%) still expect a recession. In the previous survey, CFOs were evenly split — roughly 40% in each camp — on whether the recession would begin during the first half or second half of this year. With the resilience of the economy so far, the recession timeline has predictably moved out a little. Now more than half (56%) expect a recession in the second half of 2023, and a little over one-quarter of CFOs have pushed out their recession forecast to the first half of 2024.  Â
The latest data from the jobs market released in Tuesday's JOLTS report showed a steep decline in job openings for the first time in nearly two years. That could be bullish for stocks if it gives the Fed the evidence it has been looking for in terms of a cooling in the labor market and more reason to let up on rates, or in a worse-case scenario, could represent the beginning of a more serious downturn for the economy that the Fed now can't stop. Notably for the soft landing camp, there was no increase in layoffs even as job openings tumbled.
This cautious view of the economic outlook goes with a clear, if small, shift in the balance of risks being weighed by CFOs. Both "inflation" and "Federal Reserve" policy were cited by fewer CEOs this quarter as the biggest risk their business faces, while consumer demand was cited more often. A few risks seem gone for good: for the first time in many quarters, no CFO cited the Russia-Ukraine war or Covid as a top concern.
More CFOs believe inflation has peaked – that finding has moved higher across three consecutive quarterly surveys, from under 50% to roughly 75% now. This matches a majority view from CFOs of a Fed that is doing a "good" or at least "fair" job in its inflation fight. But the latest survey was completed just before the surprise OPEC+ decision on Sunday to curtail crude oil production, which introduces a new factor into the battle against inflation.
Regardless, inflation is not going to get back to anywhere near the Fed target of 2% any time soon, according to the survey. More than half of CFOs predict that inflation will not return to 2% until 2025. A few remain unconvinced that even pegging 2025 as a return to more typical inflation is a safe bet.
The JOLTS report data on Tuesday led to a sharp decline in yields, with the 10-year hitting its lowest level in over a year, but even before that the Fed was being viewed by the market — and based on its own commentary and analysis — as nearing the end of its rate hikes. Nevertheless, the CFO view of yields hasn't budged quarter over quarter. Under 10% of CFOs expect the yield on the 10-year Treasury to be lower than it is today by the end of the year, slightly down from the view in the last survey. CFOs were almost evenly split, at 46% each, between those that expect the 10-year yield to be in a range of 3.5%-3.99%, and those that expect the yield to be 4% or higher at year-end.
