First Quarter 2023 Client Commentary
Greetings from Huston-Fox Financial Advisory Services. While we are still progressing towards the end of a bear market, the first quarter 2023 was positive for stocks and bonds. The Dow, large value stocks, mid-cap and small-cap stocks were all up between 1-2%. Technology stocks were higher by 10% after falling 30% last year. The S&P 500 was higher by 7%, almost entirely due to a handful of technology stocks rebounding. Bonds also enjoyed a positive quarter after a negative 2022. Markets remain lower over the past 12 months with technology stocks down 13% and the S&P 500 is down 10%. Reinvesting dividends, periodic rebalancing, and higher bond yields all have helped portfolios during this timeframe.
Volatility has continued this year. January was higher for stocks, February lower, and March mixed. As we enter the 15th month of a bear/down market, these patterns are typical as markets attempt to digest large amounts of information. Inflation remains front and center for the economy. The Fed may soon end the current rate hiking cycle. Fixed income markets (bonds, CDs, etc.) are showing that rates may be reduced later this year or early next year once inflation falls closer towards the Fed’s targeted rate.
Ed Yardeni, President of Yardeni Research, states “the recent banking crisis is going to be very well contained by the Fed and FDIC. And I think this is going to keep the Fed from raising rates much further.” Yardeni projects that the Fed will pause soon, and US stocks could rally 14% by end of year.
Banks came under pressure in March as Silicon Valley Bank (SVB) closed suddenly. We’ve talked about duration risk in bonds consistently as a risk we will not take on, however, SVB took on extremely long duration bonds and when depositors withdrew funds, the bank collapsed. It is important to keep bank deposits within FDIC coverage. SVB will go down as a historically mismanaged bank. One result of the SVB fallout is banks have started to lend more carefully (sometimes called a credit crunch). Less lending will have a positive impact on reducing inflation and may help the Federal Reserve in the inflation fight. The Federal Reserve is starting to see data suggesting the labor market is softening. These items are important pieces to the inflation equation.
Sean and I continue to evaluate the ever-changing economic landscape while monitoring Fed actions, inflation data, oil and other geo-political issues, and recessionary data. These factors and other issues are important to our work for you. The debt ceiling battle in DC will continue to heat up as we enter the warmer months ahead. We’ve been reading analysis on the debt ceiling from many sources, including the legislative analysis teams at Schwab and Columbia Threadneedle. There is a growing consensus that political brinksmanship will result in a last-minute resolution. Mixed in with a budding emergence of Presidential contenders, expect loud headlines.
We continue to adjust portfolios to reduce risks and take advantage of markets, including interest rate changes. At some point the market will rise, likely quickly. Melda Mergen, Global Head of Equities for Columbia Threadneedle, recently wrote, “We are very excited about 2023 and we anticipate 2023 will be an inflection point for markets. We think there is more opportunity in value versus growth stocks.” While we agree with Melda, remaining diversified is critical versus trying to time or outguess markets.
Carson Investment Research’s Ryan Detrick shared a chart recently. From 1954 to now, when the S&P 500 has returned 5% or more in the first quarter of a year (such as 2023), there is an 81% chance that markets will be higher in 6 months and a 94% likelihood of markets being higher in 9 months, with an average gain of 9.7%.
Enclosed with this reporting packet are two annual SEC required notices. We’ve made no reportable changes. Many financial firms are raising their fee structures significantly. Our fee structure will not change. Thank you for your continued support, business, and relationships. We are here to answer questions and help with your financial journey. We welcome your call, email, or in-person meeting.
Ryan A. Fox, MBA Sean C. Huston, ChFC