A positive quarter despite many challenges
Inflation, Federal Reserve monetary policy tightening, debt ceiling concerns, bank failures, the war in Ukraine, and now, the indictment of a former President does not sound like the backdrop for positive investment returns. Yet, in the first quarter of 2023, the broad U.S. equity market was up 7%, other developed international equity markets were up 7 to 8%, and short to intermediate U.S. treasuries were up 1 to 3%. Growth stocks, dominated by technology companies, appreciated more than value stocks, even though many technology companies announced layoffs. International stocks, despite the war in Ukraine and growing geopolitical tensions, outperformed domestic markets. Market returns in the first quarter remind us that stock market valuations, which are based on future cash flows, are unpredictable and that timing the market on a consistent basis is impossible.
Lessons learned from another banking crisis
The root cause of the recent banking crisis will be debated for some time. For now, reasons cited include aggressive Federal Reserve tightening and balance sheet mismanagement. What is clear is the importance of diversification. Silicon Valley Bank (SVB) and Signature Bank (SBNY) each concentrated their business models on one highly interconnected customer segment. That focus drove significant business success until it was the cause of their failure. It is important to remember that single stocks can go to zero while established equity markets do not. SVB and SBNY combined represented less than .06% of the broad equity market as measured by the Russell 3000 index. To avoid having an unexpected event materially impact your wealth, it remains important to construct a portfolio of diversified assets.
There could be a silver lining.
Could the recent banking crisis have a silver lining? For the better part of a year, the Federal Reserve has been moving aggressively to combat inflation by raising interest rates. Despite early evidence that inflationary pressures are subsiding, the Fed’s primary inflation indicators – personal consumption expenditures, unemployment, and wage growth – remain stubbornly high. This has led some to speculate that their campaign to raise rates is not over. It is possible that the banking crisis could do some of the heavy lifting for Chairman Powell. Banks may reduce lending, which may slow economic growth, but which may also have the beneficial effect of accelerating the decline in inflation. This will undoubtedly be considered as the Federal Reserve plots its course moving forward.
The first quarter of 2023 was filled with many surprises. Yet, results were positive as investors appear to be looking beyond the short-term timeframe of one quarter.