The first quarter of 2023 is in the books, and many wonder what to make of the recent headlines. The Fed raising interest rates to combat inflation was still at the forefront of the nightly news. Then came along some negative events in the financial world, dominated by Silicon Valley Bank and its meltdown. Geopolitical risks are still challenging, including the situation in Ukraine and the tensions between US and China.
But around the globe, growth has generally surprised to the upside. Most major indexes were higher for the quarter. Let’s see how some of the market components did and then we’ll dive in a little further:
| Index | 1st Quarter | 1 Year | 5 Year |
| S&P 500 Large Cap Index | +7.03% | -9.29% | +9.25% |
| S&P Small Cap 600 Index | +2.12% | -10.35% | +4.72% |
| S&P Developed BMI International Index | +6.83% | -9.17% | +5.37% |
| S&P U.S. Aggregate Bond Index (total return) | +2.91% | -4.13% | +1.00% |
| S&P Municipal Bond Index (total return) | +2.51% | -0.21% | +2.01% |
| Dow Jones Equity All REIT Index | +0.80% | -22.32% | +2.59% |
| Dow Jones Commodity Index (total return) | -3.55% | -7.59% | +8.02% |
SOURCE: DOW JONES, DATA AS/OF 3-31-2023 (DOESN’T INCLUDE DIVIDENDS UNLESS NOTED). HERE IS A COMPREHENSIVE LIST OF RETURNS.
Looking back, here are some observations.
Markets started the year with a strong January rally. Fixed-income markets also reacted positively with observations of declining inflation, bringing in prospects of easier monetary policy. Then markets declined in February, only to bounce back in March. Developed international markets (Europe, Japan) were up solidly in addition to the US.
Value stocks relatively underperformed compared to growth/technology stocks, mainly because of the banking industry concerns. The heavy lifting done by growth stocks was enough to propel the S&P500 to a positive March return, mostly in the second half of March.
If you are curious how the various sectors did, out of the 11 sectors there were 7 positive and 4 negative. Financials were the worst performer, not surprisingly, with major announcements of a couple of large banks failing. Check out this chart of regional banks versus the rest of U.S. stocks:
Tech stocks rebounded from a dismal 2022, and the inverse of that was the energy sector which was negative after consecutive strong years. Also of note, bitcoin and gold prices had strong/interesting rallies.
In looking at the 10-year Treasury bond rates, we saw a roller coaster fluctuation opposite of stock returns. Yields started 2023 at 3.88% then dropped in January, rose (peaked around 4%) in February, then down to 3.49% by the end of March. Good news for investors: yields on money markets and other short-term investments suddenly look attractive. Bad news for investors: mortgage rates are the highest they have been in recent memory and the housing market has stalled a bit.
Further, we saw volatility (measured by the CBOE Market volatility index VIX) trend down over the past 3 months. It began the year around 22-ish, spiked in mid-March to the 26-ish level, and ended the quarter around 19. For perspective, in volatile 2022 the VIX bounced around primarily in the 22-32 range. Here’s a two-year chart illustrating those VIX levels:
One other trend lower was the price of oil. West Texas crude went from $80+ to approximately $75 by quarter-end, and had dipped into the $60s for a brief time as well. Gasoline prices have changed very little in 2023 (but are down substantially from one year ago!).
Other Thoughts from Q1:
Buying low and selling high is the goal of every investor – right? Yet, periods of heightened uncertainty often lead to investors attempting to avoid losses by hoarding cash, awaiting the “right” time to reinvest. In the current environment, those staying in cash or short-term government bonds and trying to guess when markets have troughed based on monetary policy expectations are likely to find themselves with more regret than gains.
Don’t get me wrong…yields on money markets, CDs, and short-term bonds are finally worth considering. And maybe they do have a place in your portfolio. Particularly for emergency fund cash that you may have, or other shorter terms goals. But timing the market is difficult (very hard to do consistently) and markets can rebound quickly.
Speaking of first-quarter news, for more than a half-century, Berkshire Hathaway’s Warren Buffett has been dispensing words of wisdom each first quarter in his annual Shareholder Letter. Here’s a gem from his most recent release:
“The disposition of money unmasks humans.”
Isn’t that so true? How we choose to accumulate, invest, spend, and share our personal wealth says a lot about us.
Looking Ahead:
For those that were bullish for a positive 2023, they’ve been right so far! Along those same lines, there are some bright spots (which I like to look for amongst all the negativity out there!). Some expect the Fed to halt their rate hiking and that is viewed as a positive sign. Some believe corporate earnings will improve for the remainder of the year. Others say the recent turmoil in the banking sector is confined, and those worries could dissipate.
Nonetheless, the possibility of a recession still remains, and perhaps already started (we don’t know until after it has started). And our economy is still digesting the unprecedented measures taken during COVID. The Fed’s intention (by rising rates) is to cool off the economy. We’ll continue to see those effects, things like more layoffs and potentially lower profits for companies. What that means for stock prices – no one really knows. It’s impossible to forecast.
So as per usual, there are considerable uncertainties – in both directions. We continue to advise clients to maintain balance in their portfolios, with a focus on quality equities and with a value tilt. We think the International markets continue to look attractive. We like to use bonds for their intended purpose, as well as recover from a bad 2022. Lastly, we want to make sure that clients are getting decent yields on their “cash” positions. Money markets are generally paying 4.5% and higher as I type this.
What does your investment portfolio say about you? As long as it’s already structured and managed to mirror your goals, your values, and your personality, we suggest staying true to yourself and your investment plans. Warren Buffett offers some fresh advice on that as well:
“The lesson for investors: The weeds wither away in significance as the flowers bloom. Over time, it takes just a few winners to work wonders.”
As always, please let us know if we can help you look past the distracting weeds of the daily fray. In the meantime, we wish you and yours a bountiful spring.
Brandon
Disclaimer: This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the advisor. The information should not be construed as legal, tax, nor investment advice. Never make investment or financial decisions based on information provided here, without first consulting with your professional investment advisor. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Dow Jones. Data is taken from sources generally believed to be reliable, but no guarantee is given to its accuracy.
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