The Cornerstone Investment Commentary: 1st Quarter 2023
After all the varied events of 2023’s first quarter, it was expectations about future interest rate increases which most affected investment results. Again.
With total inflation (the CPI-U index) increasing ‘only’ 2.1% in the six months from September – February (a 4.3% annual clip), the Federal Reserve is seeing the signs that allow a slowing pace in its interest rate increases. This was always going to be the key to recovery in the global stock and bond markets, and patience is now being rewarded. This quarter equities gained about 7% overall and bonds rose more than 2%.
It seems worth noting that equites are now down ‘only’ 7% during the last four quarters and have made money since we rebalanced your portfolio last June. Keep in mind that 2022’s declines followed three years of +20% average annual equity returns. The four-year results remain very good! Bonds are also positive since last June when intermediate-term U.S. Government securities returned to your portfolio.
Also significant was the large out-performance of growth stocks over value stocks this quarter, a 14:1 spread in the US(!). We always expected this to (eventually) occur as rate increases slowed, and you benefited from the amount of growth equities – relative to value – in your holdings at the end of 2022. Foreign equities again outgained those in the US. We also saw strong out-performance in your portfolio’s actively-managed funds so far this year, and commodities continued to fall from their peak last Spring. Conditions seem generally favorable for the recent bond and equity recovery to continue, though perhaps not at the brisk pace of the last six months.
Of course, we may see negative surprises. Both words clearly apply to banking industry events of recent weeks. While we did see two banks ‘get it wrong’ in managing risk relative to their unique customer bases, two important points emerged: 1) The overall banking system is generally sound (as no systemic ‘bank run’ occurred); and 2) The FDIC insurance system worked as generally intended in these isolated instances.
Unfortunately, anxiety was unnecessarily stoked by ‘inappropriate extrapolations’ (as one client put it) in parts of the media, so a reminder of a few banking basics may be helpful: 1) Banks do not keep all your cash/money in their vaults; 2) Banks have always invested most deposits in long-term ventures, some of which do lose money; 3) If all depositors chose to withdraw all their deposits someday, banks wouldn’t have enough cash on hand and 4) The banking system has worked this way since 1933.
Hopefully, these recent banking trials will bestow enough level-headedness on Congress as it addresses the U.S. debt ceiling in the coming months, a situation we are closely watching and about which we will communicate as warranted as it unfolds.
With our best wishes for a pleasant Spring, thank you as always for the continuing opportunity to work with you.
The Cornerstone Investment Commentary: Year-End 2022January 10, 2023