At the beginning of January, the consensus of market strategists predicted a flat equity market for the year. However, stocks and bonds in the first quarter displayed buoyancy. Inflation continued its retreat early in the quarter until it accelerated again after the Federal Reserve tightened further. By March, there were shock waves that few predicted. Sentiment turned negative, thanks to the banking sector, as federal regulators took over Silicon Valley Bank and Signature Bank. UBS acquired Credit Suisse with assistance from the Swiss government. Recent volatility has felt high but is low from a historical basis. The volatility index (VIX) is in the high teens, below the conventional elevated threshold of 30, and far below levels of 80 plus during the Global Financial Crisis and the Covid 19-fueled market downturn in 2020.
With this backdrop, equities delivered a positive quarter. The S&P 500 was up 8.9% by early February and finished the quarter up 7.5%. The Russell 2000 small cap index finished up 2.7%, while a bellwether for international equities, EAFE (Europe, Asia, and the Far East), finished up 8.47%. Value benchmarks weren’t as fruitful due to their heavier weight to financials. However, since quarter end, oil and energy names have been higher due to OPEC cutting production by 1.1 million barrels a day. Energy is well represented in value indices.
The yield on the 10-year Treasury bond, a primary driver for mortgage rates, dropped to 3.48% from 3.88%, its most significant quarterly decline in two years. The decrease in longer rates and increase in short-term rates helped deliver a positive single-digit return for US bond investors.
At least so far, one of the most predicted recessions in modern times has failed to materialize. Despite announced layoffs, unemployment is hovering close to 50-year lows. Inflation is easing again, just not as quickly as the Fed would like. Data showed consumer prices rose 5.5% in February from a year earlier, the smallest annual gain in 15 months. We are not out of the woods yet, but the US government has all but guaranteed banking deposits, and volatility is settling. Uncertainty creates opportunity, stocks are cheaper than they have been in close to five years, and companies have been mostly successful in increasing prices.
The current consensus is that the Fed will stop raising interest rates by late 2023, while inflation is forecast to trend lower into the second half of the year. First-quarter results for companies and the economy will be released soon, and we will see how those results are interpreted. While the Fed is close to ending its rate hikes, consumer confidence is increasing off its lows; both are positive for financial assets.
We believe a philosophy that includes value, small caps, and international equities will give you the best chance for success. It is noteworthy that international stocks, after a long period of tough relative performance, were one of the best performers for the quarter, outperforming even US stocks. We feel international stocks continue to have attractive valuation today vs. historical levels.
If you have any questions or would like to discuss, please call your RCG advisor.
Benchmark Returns for the Period Ended March 31, 2023
| Quarter | 1 Year* | 5 Year* | 10 Year* | |
|---|---|---|---|---|
| US Treasury Bills (0-3 months) | 1.09% | 2.62% | 1.39% | 0.84% |
| Bloomberg US Agg Bond | 2.96% | -4.78% | 0.91% | 1.36% |
| Standard & Poor’s 500 | 7.50% | -7.73% | 11.19% | 12.24% |
| Russell 1000 Value (large cap value) | 1.01% | -5.91% | 7.50% | 9.13% |
| Russell 2000 (small cap) | 2.74% | -11.61% | 4.71% | 8.04% |
| Russell 2000 Value (small cap value) | -0.66% | -12.96% | 4.55% | 7.22% |
| MSCI Europe, Australasia and Far East (EAFE) | 8.47% | -1.38% | 3.52% | 5.00% |
| MSCI Europe, Australasia and Far East (EAFE) Small Cap | 4.92% | -9.83% | 0.87% | 5.86% |
| MSCI Emerging Markets | 3.96% | -10.70% | -0.91% | 2.00% |
| Wilshire REIT | 3.25% | -21.33% | 5.66% | 5.89% |
PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS. Indices are not available for direct investment; therefore their performance does not reflect the expenses associated with the management of an actual portfolio. The index returns above assume reinvestment of all distributions. This information is for educational purposes only and should not be considered investment advice or an offer of any security for sale.
