Stocks finished the quarter surprisingly strong. What’s next?

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After a stormy 2022, US stocks gained during the first quarter of 2023 in a surprise show of resilience despite a banking crisis, cryptocurrency meltdowns and uncertainty about what’s ahead for the economy.

What happened: Nothing about the first quarter’s performance was linear.

The broad-based S&P 500 seesawed throughout the quarter, ending January on a high note before tumbling in February, rising again in March and ultimately ending the quarter up about 7%.

The tech-heavy Nasdaq made a remarkable resurgence, soaring nearly 17% in its best quarterly gain since the fourth quarter of 2020.

Some other highlights:

  • Bond prices rose as investors wagered that the Federal Reserve won’t raise rates as high as previously expected due to the banking crisis.
  • Bitcoin gained as investors rushed to find safer alternatives to the banking system. The digital asset had tumbled earlier in the quarter after a slew of controversies hit the cryptocurrency market, including the Commodity Futures Trading Commission’s lawsuit against Binance alleging that it violated US trading laws and the collapse of crypto-friendly bank Silvergate.
  • Oil prices ended the quarter down as the banking crisis fueled fears of prolonged stress in the financial sector and a potential recession.

What’s next? Despite the first quarter’s strong performance, investors say that celebrating a Fed victory against inflation would be premature.

Earlier this month, the collapse of three financial institutions — Silicon Valley Bank, Signature Bank and Credit Suisse — set off a banking meltdown that sent markets teetering.

Wall Street largely shrugged it all off, however, with stocks recouping their losses — and then some — as investors started snapping up tech stocks, boosting the broader equity market.

But that doesn’t mean that inflation isn’t still a key factor driving the market.

Here’s what Wall Street experts are saying:

  • “I just don’t think that we’re going to get inflation down without seeing pain in the market. So, in order for it to stabilize, I think firstly we probably have to give some of these rallies back,” said Liz Young, head of investment strategy at SoFi Technologies.
  • “We’re in the middle of this taming of inflation experiment,” said Scott Duba, chief investment officer at Prime Capital Investment Advisors. “Expect the unexpected.”

The end of March means that there will be a new month’s worth of economic releases for investors to parse through, starting with a slew of jobs data this coming week.

Why that’s important: Despite Wall Street’s cheery optimism, markets are still looking for clues on how the economy is faring. The Federal Reserve’s job has been made more complicated by the tumult in the financial sector, since it’s unclear whether the cracks in the financial sector will widen. Moreover, the Fed still has yet to beat inflation.

But tamping down inflation is only one part of the Fed’s dual mandate. The central bank’s goal is to achieve price stability while keeping unemployment rates at a minimum.

The labor market has remained red hot, despite the Fed’s aggressive tightening campaign. While that may seem like good news for the Fed, it’s actually a sign that the central bank might have to tighten the economy further. That’s because strong job and wage growth means that companies pass on those higher labor costs to customers by raising prices on their goods and services.

Key reports to follow next week:

  • The February JOLTS report, or the Job Openings and Labor Turnover Survey. The number of job openings fell in January, signaling a slight cooling but still hot labor market.
  • The March ADP private-sector employment report. Hiring and wage growth in the private sector cooled a bit in February but still remained hot.
  • The March jobs report. The US economy added 311,000 jobs in February, a pullback from January’s stunning number but still hot. The central bank, and markets, will look for signs in March’s report that that isn’t a one-off and that the jobs market is indeed starting to cave under pressure from the Fed.

Monday: March manufacturing PMI.

Tuesday: February JOLTS report.

Wednesday: ADP private sector employment report.

Thursday: Jobless claims and mortgage rates.

Friday: March jobs report and February consumer credit.

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