2023 - Q1 Quarterly Keynote

BY: RYAN P. JOHNSON, CFA, CFP® - MANAGING DIRECTOR OF INVESTMENTS

Low expectations into earnings season and falling yields in January helped boost stock market returns. In February, attention turned to higher yields and further Fed hikes, but in March all eyes shifted to banks. Concerns in this area led to eased expectations for Fed hikes. While the bear market in the S&P 500 has not ended yet (using closing prices), through it all, the S&P 500 finished the quarter less than 2% from the highest level seen in the past 6 months. 

Aside from the very short end of the yield curve, most bond yields fell during the quarter, which corresponded to an increase in bond prices, which increased total return. The Fed raised its overnight lending rate in February and March, to a range of 4.75-5.0%. The next Fed announcement is set for May 3rd and the Fed may raise rates by 0.25% one more time this year. 

Employment remains strong, with the national unemployment rate around 3.6%. We are closely watching the ISM Services Index, which has remained in growth territory for its past three monthly readings. As we have mentioned before, indicators that have historically pointed towards a possible recession are on our radar. There is always a list of potential worries on the horizon, including the debt ceiling, slowing bank lending, and higher vacancies in commercial real estate. With inflation moderating and Fed hikes seemingly near an end, we believe the worries of 2022 are essentially behind us. 

The three worst performing sectors of 2022 had the best performance in the first quarter: Technology, Communication Services, and Consumer Discretionary each gained 16% or more. These three sectors recently held 44% of the weight in the S&P 500, led by Technology’s 26% weight. The top performing sector in 2022 was Energy, but this sector had nearly the lowest return in the first quarter, with a loss of over 4%. Growth outperformed the Value style for the quarter.

In aggregate, corporate sales and earnings are expected to grow very little in 2023. While earnings may show a year-over-year decline for the second straight quarter once Q1 reports are in, this could be the low for quarterly earnings, in dollar terms, at the index level. While valuation is average compared to the past 5-10 years, we suggest owning stocks with money that is allocated to 5+ year time horizons. On a 5+ year basis, we feel stocks should see historically normal returns. We expect this to be higher than what could be achieved in the bond market, even though bond yields are currently attractive. Across several metrics, skepticism is plentiful, which has often led to stock market gains over the ensuing 1-year period.

From our team to you, we thank you for your continued trust and support.

Ryan P. Johnson, CFA, CFP®
Managing Director of Investments

RISKS AND IMPORTANT CONSIDERATIONS

Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass.  This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual.  All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period.  Equity investments are subject to company specific and market risks.  Equities may decline in response to adverse company news, industry developments, or economic data.  Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall.  Past performance is no guarantee of future results.