Market Update: Quarter 1 Results & Outlook

Equities Have Experienced an Uptick in the First Quarter of 2023

Broadly speaking, nearly every stock index around the globe has seen notable gains since the start of the year. Announcements of inflation showing signs of moderating, paired with the Federal Reserve’s expectations to cut back on any aggressive rate hikes inspired Wall Street and fueled a rally in prices throughout the quarter. Policymakers have indicated their expectations for one more interest rate increase in 2023, though the broader market seems to be predicting a slightly better-than-average chance that The Fed will hold the current rate steady in May.

The US and Europe have led the way so far in 2023, with France, the Netherlands, and Germany being the largest contributors to the EU’s performance data. Information Technology was the top-performing sector across the globe excluding Latin America, as investors flocked to companies with a less volatile operating structure in times of economic uncertainty. The Silicon Valley Bank disaster sparked widespread panic in the financial industry, erasing much of the gains the industry had amassed, and concluded the first quarter results with a -5.56% return (QTD).

 

 

Fixed Income Securities Continue to Climb

Bond Indices generated positive performances in the first quarter, primarily due to a decline across the Treasury yield curve. Investor optimism over potential pullbacks in The Fed’s plan for rate hikes spurred on a rally in January, only for the global banking debacle in March to spur investors towards pursuing safer options over stocks and bonds, such as gold. Despite the volatility of late, the US Aggregate Bond Index and Precious Metals Index finished the first quarter with returns of 2.5% and 7.4% respectively.

Many investors are well aware of the inverse relationship bond prices share with rising interest rates, as the central bank raises short-term rates the prices of bonds with shorter-term maturities (1-3 years) will decrease. This process takes place due to investors finding the yields from longer-term bonds more appealing than short-term securities, to make up for this discrepancy short-term bond prices must fall to adjust for current market demand. Despite the inevitable drop in prices, investors are better positioned to earn higher total returns (prices & yields) in times of rising rates as short-term bonds can be reinvested at a higher interest rate upon their maturity.

 

 

Real Estate

Consumer demand has shifted to states with more affordable housing prices and lesser tax burdens, which has culminated in a migration to the eastern regions of the US. Inventory has begun to pick up in an effort to keep pace with demand, leading to a 60% increase in homes for sale when compared to last year, in addition to an increase in the total number of unsold homes on the market. Homes also spent an average of 54 days on the market, 18 days longer than last year but still shorter than pre-pandemic figures. While house prices have continued to rise, the growth rate in March (6.3%) was lower than February’s growth rate (7.8%).

With Real Estate having had a difficult 12 months in terms of performance (-19.69% annually as of 3/31/23), many investors have mixed emotions when considering an investment in Real Estate. Persistent recession fears in 2023 coupled with past performance in times of economic uncertainty (Great Financial Crisis) have likely fueled many of these concerns. Our primary exposure to Real Estate is through Real Estate Investment Trusts (REITs), which are much better positioned when compared to 2008. Debt levels are significantly lower, development pipelines have been right-sized, and dividend yields are not overly stretched. REITs offer diversification with exposure to cash flows generated through long-term leases which tend not to fluctuate in a similar capacity to equities in recessionary times. The graph below depicts a much better picture in terms of REIT debt levels relative to the actual market value of their real estate portfolios when compared to REIT positioning during the ’08 recession.

 

 

Outlook & Investment Updates

As always, we prefer not to waste anyone’s time attempting to conjure up an accurate prediction of the market’s performance in 2023. There are key metrics that can prove useful in gauging the current state of the economy, such as stock prices, building permits, and unemployment claims, and at this point in time these metrics seem to signal economic slowdowns in the next 12 months, which is not definitive by any means.

Here is what may be expected in 2023:

• A vigilant Federal Reserve: The Fed will use all available resources to tame inflation, this will likely mean additional rate hikes and economic slowdowns in many sectors. The severity of the slowdowns is simply unknown and is anyone’s best guess.
• China’s struggles are likely to persist: A “Zero-Covid” policy and a housing oversupply are contributing factors to reduced GDP growth expectations for China.
• Bond investments expected to outperform over the next decade: According to the Vanguard Group, annualized returns between 4-5% are forecasted for fixed income investors.

Many clients have asked us how we are investing their savings given current market conditions. Overall, our answer is a simple one that involves holding fast to a proven investment strategy, diversified across a multitude of asset classes. In terms of any specific alterations, we have begun to diversify capital away from China-based investments. The lack of transparency and integrity projected by The Chinese Communist Party (CCP) is the main driver behind this decision, which has led us to pursue low-cost investment funds that provide exposure to Emerging Markets but specifically exclude Chinese investments. For this reason, you may notice “Ex-China” funds being inserted inside your portfolio. If you would like to speak with an advisor to discuss current market conditions, or receive an update on your investment portfolio, please do not hesitate to contact us.

 

In Your Service,

 

The McIlrath & Eck Team

There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Diversification does not eliminate the risk of market loss.

All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services