Spring 2023 Market Commentary
After a difficult year for investing in 2022, the first quarter of 2023 provided a positive glimmer of hope. Even amid banking industry chaos and higher interest rates, the S&P 500 gained 7.9% and the All Cap World Index (ACWI) gained 8%. Bonds followed suit with the U.S. Aggregate Bond Index gaining 3.4%. Outside the United States, developed international markets jumped by 9.8% and emerging markets rose 4.3%. While the quarter ended well, it was volatile as markets gyrated between January gains, February losses, and a sharp rebound in March.
The market’s resilience during the quarter stands as a testament to those trying to predict stock and bond market performance. Coming off soft economic data at the end of 2022, many investors expected a continuation of year-end weakness ultimately leading to a recession. The data has not cooperated. Economic data has delivered a mixed picture, with significant gains in the Services Purchasing Managers’ Index (PMI) and employment remaining firm. February saw 311,000 new jobs added, as job openings still exceed job seekers. At the same time, traditional recession signals – such as the inverted yield curve, Federal Reserve raising interest rates, and falling leading economic indicators – are flashing caution. In short, the data remains murky.
More importantly, the markets shrugged off the banking industry debacle that saw Silicon Valley Bank (SVB) fail on March 12, due to a classic run on the bank. The run was predicated on fears of inadequate reserves, due to losses in the bank’s bond portfolio. The same day, we saw the failure of smaller New York-based Signature Bank, as well as associated fallout in the cryptocurrency markets as Silvergate crypto bank failed. Only days later, Swiss banking giant Credit Suisse failed after reporting “material weaknesses” in its financial reporting. Unlike 2008, the banks were allowed to fail, but the Fed acted quickly to guarantee bank deposits and created a new Bank Term Funding Program (BTFP) to help backstop bank liquidity needs.
The Fed continues to battle inflation with higher interest rates and now walks a fine line between remaining hawkish on inflation and pressuring financial markets (and bank balance sheets) with higher interest rates, or pausing to allow the rate hikes already in place to take effect. Fed policy works with lags of about 12 to 18 months, meaning the full impact of the 2022 rate increases will not be reflected in the economy until mid to late 2023. Whether a possible recession this year was discounted, already assumed, in the October 2022 lows or there is more economic weakness ahead is unknown. What we do know is markets are forward looking, discounting expectations for business conditions 12 to 18 months ahead. While things can change in real time to impact future expectations, markets appear to be expecting a more modest slowdown given first quarter strength. We believe that while the Fed is still playing defense, stock market volatility is likely to remain elevated.
One of the biggest changes in market conditions during the past year has been the significant increase in short-term interest rates. Savers now have an opportunity to earn interest at the highest rates in 15 years. Money market funds and one-year treasury notes yield as much as 4.5%. This makes cash management much more important than when rates were 0% and earning an extra 0.01% seemed exciting. Many banks, however, are still not providing competitive savings rates as they try to increase their margins. This provides an opportunity for Affiance to help manage cash better at higher rates.
As part of our ongoing investment planning service, we made changes to portfolios during February as traditional bonds and international markets became more attractive. We will continue to make updates as warranted, to keep portfolios well-positioned for current market conditions. We know we can’t control the ups and downs of markets, but we can rely on our disciplined investment processes to provide well-designed, tax-efficient, globally diversified portfolios that suit our clients’ investment planning needs.
Thank you for your continued confidence in our work.
The views represented in this commentary are not meant to be construed as advice, testimonial or condemnation of any specific sector or holding. Investors cannot invest directly in an index. Unmanaged indexes do not reflect management fees and transaction costs that are associated with some investments. Past performance is no guarantee of future results. To discuss any matters in more detail, please contact your financial advisor.