Market Update April 19, 2023
Despite the 2nd and 3rd largest bank failures in U.S. history, stocks and bonds logged nice gains in the first quarter of 2023. U.S. stocks as measured by the S&P 500 were up 7.5%, the MSCI EAFE index of established foreign market stocks was up 8.5%, and the MSCI Emerging Markets index was up 4.0%. Bonds also got a bounce, up 3.0% as measured by the Bloomberg U.S. Aggregate index.
The rally in U.S. stocks was not as good as the primary index would indicate. The bulk of the gain was powered by a bounce in the large cap technology stocks that got hit hard last year. The S&P 500 Equal Weight index in which all 500 constituents form an equal share of the index value was up a much more modest 2.9% in the first quarter. By comparison, the tech-laden NASDAQ was up a whopping 17.1% in the first quarter offsetting some of its 32.5% loss from 2022. The difficulty for investors with large losses is that it takes even bigger gains to recoup lost capital. As a simple, extreme example, an asset that loses 50% of its value would need to rally 100% to get back to where it started.
For now, the failures of Silicon Valley Bank and Signature Bank appear to be isolated cases involving unique circumstances and poor risk management. How banks can think it is appropriate to invest their customers’ short-term deposits into long-term bonds is beyond me. These failures weighed most heavily on financial sector stocks as fears rose that other banks might fail too. This sector does seem to be regaining its footing with earnings reports assuaging investors’ concerns. A big beneficiary of the bank troubles were Treasury bonds. According to the Wall Street Journal, these staged their biggest one-day rally by one measure since 1987. This rally resulted in a sudden plunge in bond yields due to the inverse relationship between bond prices and yields. Treasury yields still remain the most attractive they have been in about 15 years with corporate bond yields also being much better than recent history.
Future stock market performance is largely a function of their valuation. Stock valuations are commonly measured by their price relative to their earnings. With the economy expected to slow due to the Federal Reserve’s increases in the Federal Funds rate and tighter lending standards following the bank collapses, earnings expectations for this year are coming down. This has resulted in rising stock valuations. The combination of higher stock values and attractive bond yields makes stocks and bonds close to fairly valued versus one another for the first time in 13 years. Since 2010, stocks have been more attractive than bonds due to the incredibly low level of bond yields.
Where stocks and bonds go from here will likely hinge on inflation, Federal Reserve policy, and the extent of the economic slowdown. Stocks and bonds seem intent on going sideways for the time being. With bond yields up and many stocks paying attractive dividends, at least investors are now being paid to wait.
We hope you are having an enjoyable spring and welcome the opportunity to discuss any needs or questions you may have.
Sincerely,
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President
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· The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The MSCI EAFE index and the MSCI Emerging Markets index are unmanaged indexes compiled by Morgan Stanley Capital International that are generally considered representative of the developed international stock market and emerging international stock market, respectively. International securities involve additional risks including currency fluctuations, differing financial accounting standards, and possible political and economic volatility, and may not be suitable for all investors. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. NASDAQ covers 4500 stocks traded over the counter. It represents many small Composite index company stocks but is heavily influenced by about 100 of the largest NASDAQ stocks and is a value weighted index calculated on price change only and does not include income. The Bloomberg US Aggregate Bond index is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the U.S. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
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