1st Quarter 2023 Review
Both stocks and bonds trended higher during the 1st quarter of 2023 providing some relief to investors. Not surprising, some of the sectors that performed the worst last year have bounced back the most year-to-date and, although the recovery has been strong in recent weeks, risk remains. Silicon Valley Bank mismanaged risk, had a run against their bank, and ultimately collapsed on March 10th; becoming the largest bank failure since 2008. Signature bank and Switzerland’s Credit Suisse were collateral damage as contagion fears spread across the banking sector. Bank stocks mostly underperformed as the market tries to decipher which banks managed interest rate risk appropriately.
Inflation remains a risk for the market and the Fed raised rates in March by 0.25% in an attempt to further bring prices down. Despite these risks, stocks tend to move higher after experiencing a steep selloff like the one we saw last year. The market remains unpredictable but maintaining a diversified portfolio led to solid performance for the first quarter.
U.S. stocks advanced with the S&P 500 Index returning 7.50% during the quarter. Mid and Small-cap stocks fared a bit worse only returning 3.81% and 2.72%, respectively, as measured through the S&P Mid-cap 400 and Russell 2000 Index. The tech-heady NASDAQ Composite Index rose 17.05% for the first quarter. It is worth noting that this index lost 33.1% last year. Many of these stocks declined by more than 50% and while most have not fully recovered, the rally in these stocks has been particularly strong towards the end of March. The forward-looking capital markets seem to be looking for an end to rate hikes or at least a slower pace of hikes in the near-term.
International and Emerging Markets
In the Eurozone, inflation remains elevated with year-over-year inflation sitting at 8.5% for February’s reading, which was 2.5% higher than in the U.S. The European Central Bank raised rates to 3.5% in March in an effort to combat inflation. Much like the U.S., these interest rate hikes can put pressure on European economies and has the potential to trigger a recession.
Despite these challenges, the international EAFE Index advanced 8.47% in the first quarter. This index includes stocks from 21 developed market countries with roughly 62% invested in Europe and 23% in Japan.
Emerging market stocks advanced 3.96% for the 1st quarter. Over 30% of this index is made up of Chinese stocks. These stocks are starting to perform better after having a disastrous 2022, caused by ongoing shutdowns while the government enacted their “zero COVID” policy. At CRA, most client portfolios remain underweight in their positioning to international and emerging market stocks in favor of holding more stocks domiciled within the U.S.
Fixed Income and Interest Rates
The Federal Reserve raised rates a quarter of one percentage point on March 22nd but expressed concerns in their commentary over recent bank failures. Weakness in the banking sector caused bond yields to fall and most blue chip stocks to advance. Stocks in the past have performed quite well once the Fed has completed its final rate hike for a cycle. While it does not appear we are at this point, it does appear that most of rate hikes are complete, which has been historically bullish for the market as seen by the chart to the right. So, while stocks and bonds both fell in 2022, year-to-date we have seen both advance, boosting the balanced portfolio that typically invests in some combination of the two.
The Aggregate Bond Index returned 2.96% while Municipal Bonds returned 2.78%. Despite the Fed raising short-term rates, longer-term yields that the market determines declined for the quarter. Bond prices and interest rates are inversely related and this decline in rates helped buoy prices in a reversal of trend to what we saw throughout 2022, when rates skyrocketed.
Oil and Commodities
Oil ended the quarter at $75.67 a barrel for WTI Crude but jumped to $80.61 the first day of trading for Q2 as OPEC Plus cut oil output by 1.2 million barrels per day. Still oil remains flat for the year, up just 0.2%. While gas prices nationwide remain nearly 20% lower than they were a year ago, a rise in oil and gas prices could cause inflation to remain sticky.
Gold rose for the quarter finishing at a price of $1,977.96 per ounce representing a gain of around 8.5% and reaching near an all-time high. Silver stayed essentially flat for the quarter.
What's Ahead for the Rest of 2023?
The S&P 500 Index dropped over 25% from its peak last year but has since appreciated around 15%. While the current rally has been strong, numerous risks for the market remain. The market’s expectation is that the Fed should end its rate hiking cycle in the near-term, but it is too early to declare victory in the war against inflation. Additionally the rate hikes have come at a cost as the banking sector is facing immense pressure with more closures possible. Congress also will need to raise the debt ceiling by around July of this year in order to be able to continue to pay their bills. This political theater could become more magnified as we move towards the end of this quarter and into Q3 if an agreement is not reached.
Despite risks, the market often times has some of its best years after some of its worst. Additionally, seeing bonds perform well to start the year shows that a balanced portfolio can still provide return now that rates have stabilized. At CRA, we look forward to working with you as we navigate the rest of the year together and want to thank you for your consistent trust in our team.
As always, let us know if you have any questions.
CRA Investment Committee
Matt Reynolds CPA, CFP®
Tom Reynolds, CPA
Robert T. Martin, CFA, CFP®
Gordon Shearer Jr., CFP®
Jeff Hilliard, CFP®, CRPC®
Joe McCaffrey, CFP®
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