Client Newsletter Q1 2023
Dear Friends,
Happy Spring! Despite the Silicon Valley Bank debacle and continued interest rate hikes, in the words of Larry David, the first quarter of 2023 was “pretty, pretty good”. The S&P 500 rose 7% thanks to the laggards from last year outperforming (Technology, Communications and Consumer Discretionary). The sectors that did less terrible last year (Financials, Energy and Healthcare) are lagging this year. Why did the market deliver a positive first quarter? Three reasons:
Global economies are catching up to U.S. Growth.
The labor market is strong.
The rate of price increases is slowing.
Without sounding like a broken record (I talk about interest rates in every letter), the biggest driver of stock prices lately is the Fed. Over the past year, interest rates went from near zero to close to 5%. Since the depths of COVID in 2020 through the end of 2021, low rates were great for stocks. Unfortunately, the Fed has been on a rate increase bender and has indicated some future rate hikes unless the data changes. It is possible the next hike will be smaller followed by a pause which would signal lower rates ahead. We will keep our fingers crossed for this scenario.
News of Signature and Silicon Valley Bank fails had many pressing the panic button in March. Some were crying wolf and making analogies to the great financial crisis in 2008. These failures are not similar. Signature and Silicon were chasing money in venture capital and crypto while ignoring proper risk controls. Depositor cash stopped coming in during the market slowdown in 2022, and the deposits the banks did have were tied up in quality long-term bonds that dropped in value due to rising rates. As a result, they did not have enough cash on hand to fulfill redemption requests. Much of the hysteria was amplified by social media, causing possibly the fastest bank run in history. The good news is that large, diversified banks with strong balance sheets and risk controls are in good shape. Some smaller regional banks are facing pressure. We feel this will cause a credit crunch that will affect small businesses and some real estate sectors such as office buildings.
Elsewhere, consumers are using their credit cards and tapping into savings accumulated during the pandemic to meet their needs. This is something to keep an eye on, but the job market remains strong, and wages are rising. You’ve probably seen the headlines about thousands of layoffs at the tech giants. Yet, jobless claims throughout the U.S. remain low and most Americans have job security. Overall, consumer confidence went up in the first quarter. Let’s hope it stays that way.
As the job market remains solid, we expect the economy to continue to expand, albeit slowly. Of course, we can run into some headwinds that will slow the economy and market. Pressure on small banks will hurt small business lending. Demand for trucking and shipping has dipped. Is this realigning after the pandemic expansion or a sign of contraction? We shall see.
While we will keep a close watch on how these factors play out, it’s important to keep in mind that corrections are healthy for the market, and structurally, we are in good shape.
As always, if you anticipate changes to your personal financial situation or would like to review your portfolio, please contact us at 847.205.5210.
Warm regards,
Investment Advisory services offered through Moonstone Asset Management, Inc. a registered investment adviser
Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.
This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.