Q-1 2023 was a volatile quarter with many, many days of 1% or more movement in both stocks and bonds. The regional banking crisis in mid-March, however, changed market sentiment (once the Fed, Treasury and FDIC stepped in) which led to a very healthy rally into the quarter end. Q-1 returns are as follows: SP 500 +7.4%, Dow Jones +0.77%, R1000 Growth +14.3%, R1000 Value +0.83%, EAFE +8.47% & EM +3.96%. The Bar Cap Aggregate Bond Index was up 2.96%, Muni Bond Index +2.76% and High Yield Bonds + 3.57%. Most of these indices were up slightly or flat before the regional banking crisis. So, what changed?
The result of the run on deposits at Silicon Valley Bank and its resulting demise initially caused a flight to quality with interest rates decreasing meaningfully and stock and bond prices heading higher. The theory is that banks will tighten lending which slows the economy, and the Fed therefore will not have to raise rates much higher to get inflation under control. The risk of course is how much economic slowing will we have and its resulting recession risk and hit to corporate earnings.
Speaking of Q-1 earnings, reporting season starts very soon and includes management forecasting the balance of 2023. This will be telling on a short-term basis but as usual, holds little value as we are long-term investors. Wall Street strategists are all over the lot as far as earnings predictions and where the market will land by YE 2023. One well-known Morgan Stanley strategist, who has been quite negative and correctly so since early 2022 quoted on 3/21/23 “this is the beginning of the end to this bear market”. That doesn’t sound too optimistic, does it? Remember though that every bear market ends with the start of the next bull market!
Amongst continued volatility we will seek opportunities to add to high-quality, growing companies with reasonable valuations and in many cases growing cash dividends.