Q1 2023
Dear Client,
We hope you all have had a good start to the year. The markets have shown some strength in the face of expected and unexpected difficulties. This sort of quarter reminds us of the value of humility and balance both in life and investing. As we approach the tax-filing deadline for 2022, we have heard from many of you or your tax-preparers. If you are still in need of any documents or information to complete your returns, please reach out to us. Once you have settled your 2022 tax filing, it may be a good time to review your accounts and finances and begin to plan for tax-year 2023 and beyond (it’s never too soon). We are available to review your specific accounts and investments, as well as to discuss strategies and long-term planning. Please get in touch to arrange a time to talk or meet.
Equity markets returned a surprisingly strong positive performance for the first quarter. There was almost universal consensus at the end of 2022, that the first half of 2023 would be grim, with recovery following in the second half. That may still come to pass, but the odds have decreased after a strong first quarter. The markets showed surprising resilience in the face of a banking crisis, declining earnings, persistent inflation, and a Federal Reserve (Fed) still resolved to use rate hikes to try and control inflation. First quarter index changes were as follows (calculated from wsj.com/market-data):
S&P 500 change: 6.64%
Nasdaq Composite change: 15.72%
Dow Jones Industrial Average change: .38%
Ten Year Treasury Yield change: -7.18%
Crude Oil (WTI Front Month Contract) change: -6.08%
Gold (GLD ETF) change: 6.95%
The bulk of the strength during the quarter came from the big tech companies that comprise over 50% of the Nasdaq Composite Index. Those that overlap into the S&P 500 index helped counteract the weakness in financials and energy stocks there, and the lack of big tech representation in the Dow Jones Industrial average explain that index’s underperformance during the quarter.
The collapse of Signature Bank, and more importantly Silicon Valley Bank (SIVB), during the quarter were an unfortunate surprise for market participants. A pleasant surprise was the resilience of the equity markets in the face of an as-yet unknown amount of stress rippling through the underpinnings of the bank sector. The Fed kept to their plan directionally by increasing the short-term lending rate by another .25% to a range of 4.75-5%. This was less than the .5% increase some were expecting before the bank collapses. The Fed’s maintaining a tightening stance in the face of the bank issues is an unknown quantity. Striking a balance between fighting inflation and not completely collapsing the economy seems to have become a very fine line. After a full year of rate hikes at an unprecedented rate, the consensus expectation is for another .25% hike at the May meeting and then a pause as we all wait to see what effects have been set in motion, but have yet to bubble to the surface.
We would be remiss not to also mention the geo-political issues that are lurking. Among others:
Russia’s invasion of Ukraine is ongoing, and liable to become more unpleasant as Finland and (probably) Sweden join NATO.
Friction with China is increasing in various areas and manifestations. Further unpleasantness over Taiwan has the potential to significantly disrupt global supply chains.
Saudi Arabia and the Middle East continue to be areas where uneasy alliances are being tested, and formerly aligned interests are now up for debate.
Any of these areas could bubble up into situations that will affect the economy and the markets.
Now that we have aired our concerns, it’s important to say; we see an impressively resilient US and global economy in the face of all of this.
We have continued to see value in Treasury Bills. Although rates have moved down a bit from their peak during the quarter, they are still quite attractive relative to any time in the last 15 years. We have also found a few interesting ideas in the equity market, but on the whole, we are cautious at current valuations. Earnings declined year-over-year for Q4 and are expected to decline by a greater margin for Q1. While we all have been anticipating a recession as a result of the Fed tightening, the reality of an earnings recession is starting to settle in and will likely have to be reflected in valuations before we can reasonably expect markets to move markedly higher. With that expectation, we are more inclined to make sure we have some cash available, keep an eye on our long-term positions, and look to see how things shake out rather than try and jump ahead of the data.
We look forward to hearing from anyone who would like to discuss the market, the economy, or their own finances more in depth.
We wish you all the best for a beautiful spring and we will keep working hard on your behalf.
Best Regards,
Bo and Lesley
