2023 First Quarter Client Letter

2022 had not been a good year. In a rare occurrence, both equities and bonds had fallen. Stocks fell over 18% and bonds fell 13%. The massive liquidity that had been injected into world economies had caused inflation to surge, rising to a 40-year high. In response, the Fed ratcheted rates ever higher, raising them seven times in 2022 and vowing more hikes in 2023. It was possible the swift and dramatic rate increases could cause stress to parts of the economy, causing unintended consequences. As we entered 2023, there was a lot to worry about. The question was what to do about it.

The first quarter was certainly eventful. It was full of quick market movements and sharp reversals. Of course, we had the usual political disputes and posturing. There was even a brief bit of intrigue as apparent spy balloons drifted silently over parts of the U.S. It would soon get stranger than that.

In March, unintended consequences of rapid rate hikes began to emerge. Changes in bond prices and deposit flows pressured some specialty banks. Within days, this resulted in two banks being taken over by bank regulators. Days later, a distressed Swiss bank was forced into an arranged merger with a competitor.

Markets and the Wall of Worry      

We have guided clients through many volatile markets. One of our key principles to get through them is to remember that financial markets are “discounting mechanisms.” This means that markets discount, or take into consideration, all available information including present and potential future events. This process collectively arrives at a value at that moment. That value likely includes the uncertain level of interest rates, the possibility of recession, pressure on banks and many other factors.

As in life, uncertainty and unsettling events are part of investing, as the last few years have shown. As time passes, these events are often less than the worst-case scenarios some expected. The markets recover, albeit sometimes slowly or haltingly, and the power of commerce and human ingenuity are again revealed. This is called climbing the wall of worry.  

So Far, So Good

Through these events, some might be surprised at how markets performed the first quarter of 2023. Brace yourself. Most markets rose. The Dow Jones Industrial Average managed a gain of 1% despite pressure on energy prices.  The broader S&P 500 did better, increasing 7.5%. The Nasdaq Composite, which took a beating in 2022, soared 17%, rising the most since the recovery from pandemic lows in 2020. Mid-sized stocks also advanced. Despite turmoil in bank stocks, the Russell 2000 Index edged up 2.7%. International stocks also gained. The MSCI EAFE International Index jumped 8.5% for the quarter. Bonds also rose, despite two rate hikes in 2023. The Barclays Aggregate increased 3.0%.

As encouraged as we are that investments have performed so well given the multiple challenges of 2023, we know our work isn’t done. This is fluid and could go on a while. Investing always involves risk. It is unavoidable and sometimes seems to come from every angle. We do, however, have tools to help. Some are technical like advanced mathematics and risk modeling. Some are more basic. During all market conditions, we try to include healthy doses of restraint and basic common sense when making portfolio decisions. Over time, these principles have served us well.

As always, we take our commitment to you seriously. We understand that communication is important. We are here if you need anything or would just like to talk.

Sources: Forbes, CNBC, S&P Global, Wall Street Journal, The Economist, Federal Reserve Bank of St. Louis

The performance of an unmanaged index is not indicative of the performance of any particular investment. It is not possible to invest directly in any index. Past performance is no guarantee of future results. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Three-year performance data is annualized. Bonds have fixed principal value and yield if held to maturity and the issuer does not enter into default. Bonds have inflation, credit, and interest rate risk. Treasury Inflation Protected Securities (TIPS) have principal values that grow with inflation if held to maturity. High-yield bonds (lower rated or junk bonds) experience higher volatility and increased credit risk when compared to other fixed-income investments. REITs are subject to real estate risks associated with operating and leasing properties. Additional risks include changes in economic conditions, interest rates, property values, and supply and demand, as well as possible environmental liabilities, zoning issues and natural disasters. Stocks can have fluctuating principal and returns based on changing market conditions. The prices of small company stocks generally are more volatile than those of large company stocks. International investing involves special risks not found in domestic investing, including political and social differences and currency fluctuations due to economic decisions. Investing in emerging markets can be riskier than investing in well-established foreign markets. The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The Russell 2500 Index measures the performance of the 2,500 smallest companies (19% of total capitalization) in the Russell 3000 index. The S&P 500 index measures the performance of 500 stocks generally considered representative of the overall market. The Wilshire REIT Index is designed to offer a market-based index that is more reflective of real estate held by pension funds. CRN-5608137-040423