Market Commentary March 31, 2023
Welcome to a new year in the market with new dynamics already shaping the investment landscape. The S&P 500 started the year strong, finishing the quarter up 7.0%. Additionally, International stocks rallied in the quarter as the MSCI EAFE was up 7.7%. Bonds also started the year on a positive note with the Bloomberg US Intermediate Term Corporate Bond Index increasing 2.5% for the quarter.
Market breadth has been narrow for equities so far this year. We’ve noted in prior commentaries that concentration among the largest of companies in the S&P 500 has been high and so far this year we’ve seen this trend continue. At the beginning of the year the 10 largest companies in the S&P 500 accounted for 20.5% of the entire index. That means 2% of the companies accounted for 20.5% of the market. By the end of the quarter the 10 largest companies in the index accounted for over 29% of the index.
In a reversal from last year technology, communications and consumer discretionary stocks have outperformed the broader market. While on the downside the financial, energy and healthcare sectors have so far been the worst performers for the year.
Digging in to financials more, during the quarter we saw several banks fail including the second largest bank failure in US history, Silicon Valley Bank. One of our analysts, Ron MacWilllie, wrote an article that was sent out to clients and posted on our website providing some details of the bank failures and the policy responses as a result. In the article Ron notes “while other banks may be exposed to some of the same idiosyncratic risks that led to the failure of Silvergate Bank, Silicon Valley Bank, and Signature Bank, it was a coincidence of certain risks and human behavior that led to their failure.”
Three common threads were identified in evaluating the recent bank failures “1) the nature of the depositors’ business, 2) the high ratio of noninterest bearing deposits to total deposits, and 3) the high ratio of uninsured deposits to total deposits.”
The Federal Reserve responded to the resulting instability in the banking sector with the creation of a “Bank Term Funding Program” (BTFP). This program allows banks to borrow from the federal reserve for a year by placing assets up for collateral at their par values and not current market values which may be lower as a result of higher interest rates.
In our opinion this new lending facility and the very specific factors driving runs in the banks that have failed this year indicate that a wide spread banking crisis is unlikely.
This turmoil among banks has also brought scrutiny to the Federal Reserve’s interest rate hike regime. Some have called in to question whether or not it is prudent to continue raising rates when there are signs financial institutions are feeling the strains of higher rates. On the other hand, the labor market continues to be robust with unemployment remaining near multi-decade lows and inflation data persists higher than targets.
After a truly historic year for rate markets in 2022, the first quarter has brought more fireworks. January was a historically strong month for bond indexes, and then February proceeded to erase all of those gains. March followed with news of bank failures, which only exacerbated the whip saw affects in rates. Days of 20 basis point rallies were commonly followed by 20 basis point sell offs as markets weighed the implications of banking sector uncertainty and its effects on Federal Reserve policy decisions. By the end of the quarter, indexes had again found their way near the YTD highs of late January. Stay tuned though, as employment and inflation data (the 2 legs of the Federal Reserve mandate) continue to move rate expectations – both on the short and long end of the rate curve.
As always, if you have questions regarding your portfolio, please consult your financial advisor. We appreciate your continued trust in SG Long Financial and look forward to working with you in the future.
Rob Richardson, CFA
Chief Investment Officer
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