April 10, 2023
The first quarter of 2023 generated positive returns for both stock and bond investors despite turmoil in the banking sector and the failures of Credit Suisse, Silicon Valley Bank, and Signature Bank. Inflation has drifted lower and the Federal Reserve has begun to tone down its hawkish language, suggesting an easing of monetary tightening with fewer and smaller interest rate hikes in the future. Corporate profits have remained strong, and the employment market has been surprisingly robust in the face of a gradually slowing economy.
Stock markets have shifted gears several times already this year. Emerging market stocks led returns in January before US Small Cap stocks took over in February. In the end, developed international markets finished the quarter with the highest gains, up +8.5%, followed by US large company stocks at over +7%.
Returns in US markets were driven primarily by growth stocks, led by technology, which rebounded strongly from last year’s dramatic declines. By contrast, financial services and energy companies ended the period down, causing the value category as a whole to lag.
Bond markets have also vacillated this year, though not as dramatically as in 2022 when the US Aggregate Bond Index lost a historic -13%. That benchmark ended the quarter up almost +3%.
All things considered, markets produced respectable first quarter returns, particularly in the context of a barrage of alarming media headlines.
LongView’s base case is that the global economy will continue to decelerate as the lagging effects of monetary tightening work their way through the system. What’s more uncertain is whether this path will lead to a steep economic contraction or if we’ll emerge from a period of readjustment without entering another recession.
There is, as usual, no shortage of pessimists, including many Wall Street analysts. Pundits cite higher interest rates on credit card debt, mortgages, and corporate loans, which are dampening consumer spending, business investment, and housing prices. There could be additional tightening of financial conditions if recent banking failures usher in stricter lending standards, and though it is falling, inflation hasn’t been fully tamed yet.
Consumer savings rates are down while consumer debt has increased. Corporations are also beginning to see pressure on profit margins, which could intensify if higher costs and slowing demand cause earnings growth to slow.
The yields on long-term bonds have fallen below short-term Treasury bills, indicating that bond investors are positioning for just such an outcome. (This kind of “inversion” in the yield curve has often foretold recessions.)
Other investors are looking past these economic challenges toward a subsequent recovery. Last year’s rapid rise in short-term interest rates had the desired effect of slowing an overheating economy. With clear signs that inflation is flagging, rates are probably close to their peak. Growth has recently turned upward in some parts of the world, with help in Europe from a mild winter and in China from the end of strict Covid lockdowns. The US job market remains strong. Stock prices, which have held up well so far this year, suggest that we might have an economic “soft landing.”
Moreover, the optimists argue that the Federal Reserve Bank will cut interest rates if faced with a possible recession. While the recent bank failures are a sign of the stresses caused by the rapid rise in rates, markets have been reassured that the Fed and other central banks intend to support the banking system at any cost.
Despite their gains this year, both stock and bond prices remain well below 2021 levels. International stock valuations are cheap by historical measures, as are small company and value stocks in the US. Bond yields are attractive again. While consumer sentiment is not far from the all-time lows of last summer, investors who stay in the market have historically been rewarded following such troughs.
To conclude, last year’s worst fears have so far proven to be overblown, but its disquietude persists. We believe that consumers, businesses, and investors will be navigating a world of slower growth and higher interest rates for a while, and we expect market volatility to remain elevated in this period of heightened economic and geopolitical uncertainty. The upside of volatility is the investment opportunities that it can provide, and we anticipate no shortage of these over the coming months.
It’s spring, and the season for company shareholder meetings and proxy voting is upon us. This year, shareholders are introducing a record number of resolutions on issues like climate change, equal pay for women, and diversity. Such concerns are gaining traction, and the amount of money invested by socially responsible investors continues to grow, despite the backlash against ESG investing. For a review of this year’s proposals, please see “It’s Voting Season for Investors,” a recent blog post written by our Sustainability Manager and Operations Coordinator, Leah Cantor. You can find the blog on the Points Of View tab on our website – longviewasset.com.
Also, please stay tuned for our next webinar in LongView’s financial empowerment series. Personal finance expert Bridget Jones will address risk tolerance and wise investing on June 7. An invitation with a link to the webinar will be forthcoming.
Thank you for your trust and your business. We wish you peace, health, and a beautiful Spring.
The LongView Team