The first quarter proved to be a roller coaster ride for investors as the economic narrative and sentiment shifted from fears of a hard landing to the hope for a soft landing. Despite the shifting tenor, the S&P 500 rose a solid 7.50% for the quarter, while global stocks as measured by the MSCI ACWI increased 7.31%.[i]

Growth stocks were the real standout as expectations of elevated inflationary pressures began to dissipate, the end of the Fed’s tightening cycle appeared on the horizon, and the risks of imminent economic slowdown were allayed. As a result, the tech-heavy Nasdaq Composite rebounded, rising 17.05% for the quarter.

During the quarter, the collapse of Silicon Valley Bank (“SVB”), the sixteenth largest bank in the U.S., along with a handful of other regional banks sparked concerns regarding the health of the U.S. banking system and the potential for a broader economic fallout. While certainly unnerving, any fears of a redux of the 2008 banking crisis are misplaced. The circumstances surrounding the SVB collapse are largely related to the concentration of the bank’s clientele and the necessary liquidity to meet a flood of depositor outflows. For comparison, the 2008 financial crisis was caused by toxic assets on over-leveraged and undercapitalized balance sheets.

To alleviate market panic, the Fed, FDIC, and Treasury announced three steps. All depositors would be made whole, and customers would have full access to their funds. The Fed also created a new facility called the Bank Term Funding Program (“BTFP”) that would offer loans for up to one year to banks to provide immediate liquidity to meet any needs. The swift response brought some much-needed calm to the markets.

As the chart from Ned Davis below highlights, the rapid BTFP response plugged a $620 billion hole created by the unrealized losses on bank securities holdings, which was brought on by the rapid rise in interest rates over the past year.

Ironically, the potential fallout from the regional bank saga creates an environment that is “sufficiently restrictive” and aids the Fed in achieving its goals of slowing the economy and tightening financial conditions. Looking forward, regional bank lending will likely be reduced, and lending standards will tighten further.

Although some of the recent events may appear cautionary, there are a few things to consider before becoming overly negative:

· The lending environment has already been tightening since rates began rising a year ago.

· Corporate and household balance sheets remain in a historically solid position.

· The end of February appears to have been a positive turning point for stocks, which proved resilient during the March turmoil.

· Excessive optimism has been alleviated (recall sentiment is often a contrary indicator).

· The technical backdrop for global equity markets remains in an uptrend, overall.

The quarters ahead will undoubtedly have their share of volatility as the corporate earnings picture unfolds. The extent to which results meet or beat consensus expectations will materially influence the prospects for the remainder of the year. Signs that inflation is continuing to moderate, and the tight labor market is cooling, will go a long way to affirm an end to the Fed’s tightening cycle.

Our continued defensive portfolio allocation acknowledges the reality of a challenging corporate earnings environment, and the impact downward earnings revisions could have on broader economic growth. As the earnings, inflation, and employment picture unfolds, we recognize the market bottoms well before earnings revisions will bottom. We will remain disciplined and continue to adhere to our process while we eagerly await the opportunity to increase equity exposure when our framework confirms evidence of an improving environment.

Disclosures:

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such. The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. Different types of investments involve varying degrees of risk and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Economic factors, market conditions and investment strategies will affect the performance of any portfolio, and there are no assurances that it will match or outperform any benchmark. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss.

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Q1 2023 Market Commentary