Market Commentary April 2023

Individual Investors are often pushed to emotional extremes of optimism and pessimism.  Investors become less aggressive after a negative year in the market only to miss out on higher returns later.  Such is the case when 2022 came to an end and the stock market had punished investors with a -18% return.  To make matters worse the bond market not only experienced a negative return but marked one of the worst years ever.

At the beginning of 2023 many expected more of the same.  Understandable but not historically accurate.  It is in fact rare for the S&P 500 to experience back-to-back down years.    Reviewing data since 1950 we note the S&P 500 has only experienced back-to-back negative years three times, 1973/1974, 2001/2002 and 2002/2003.

Banking issues dominated headlines in March.  The failures of Silicon Valley Bank (SVB) and Signature Bank rattled investors and sparked fears of contagion in the banking system.  However, over that weekend the federal regulators announced the government would guarantee all deposits at both banks, in other words a bailout.  Problem solved?    Weren’t we always led to believe your deposits up to the level of FDIC coverage were insured, beyond that dollar amount you took your chances.  This did not apply to depositors of SVB and Signature Bank as the banks were suddenly determined to be systemically important banks.  Here is hoping you get the same treatment if you ever need it.

The broad stock market moved ahead 7.5% in Q1.  A nice return for the index.  Growth stocks, powered by declining interest rates moved 14% higher while last year’s darlings, value stocks eked out a 1% return.  Foreign stocks were higher in the quarter but still slightly lagged domestic stocks.  The dollar’s decline in Q1 is part of the reason foreign stocks moved higher.  Small company stocks had been on a tear but gave up much of their returns in March as the market rotated back to large cap companies. The financial sector with a heavy weighting to banks was the worst performing sector in Q1 to no one’s surprise given the two bank failures previously mentioned.

Interest rates dropped over the first quarter with both the two and ten-year treasury’s lower than they started the year and down from their peak near the end of February.  The two-year treasury began the year yielding  4.4%, climbed to 4.8% and closed the quarter at 4.06%.  The ten-year treasury took a similar path and ended the quarter yielding 3.5%.  With a two-year yield higher than ten year the yield curve remains inverted.

Commodities, which in 2022 provided investors with shelter from negative stock and bond returns, gave back about 5% in Q1.  Much of the decline here was driven by lower oil and natural gas prices.  Oil’s decline has turned completely around the first two weeks of April.  Another commodity, gold, is starting to show strength and breached the $2,000 per ounce price in April.   You have gold prices, considered a store of value, moving higher and interest rates heading lower, quite a conundrum.

As we press into the second quarter we believe our portfolios, with some minor allocation shifts, are appropriately positioned given what we know.  All eyes continue to remain on Chairmen Powell and his peers to see what direction interest rates may take and how the rate of inflation might be impacted.