While it may have been hard to notice given all the volatility and business news headlines, stocks had a solid quarter with the S&P 500 rallying about 7% on the back of a recovery in large capitalization technology stocks. Notably, Apple and Microsoft which together comprise nearly $5 trillion in value (over 13% of the S&P 500’s value) had solid starts to the year and have accounted for a large part of the index’s gain for the quarter. Other tech stocks like Meta (Facebook) and Nvidia were each up over 70% in the quarter after falling over 50% last year.  Remember, if you lose 50% one year and then make 50% the next, you are still down 25%!  As you may recall, the Nasdaq composite index, which has a large concentration of tech stocks was down over 30% last year, considerably worse than the S&P 500 which was down only 20%.  As sometimes happens in equity markets, there is some reversal of extreme performances, which was also evidenced in the energy sector, last year’s top performing sector as crude prices sank along with the performance of stocks within that sector. 

Obviously, the elephant in the markets last quarter was March’s distress in the banking sector brought on by the collapse of several mid-size, regional banks that caused a crisis in confidence among depositors throughout the banking system. While most all banks have issues with the mismatch of maturities of assets and liabilities, the banks that collapsed had unique business models. poor risk management and depositor characteristics that made them more prone to bank runs.  The mismatch in maturities is because banks assets are typically commercial loans, mortgages and investment securities, which can have maturities of up to 30 years, while their liabilities in large part are customer deposits, which can be drawn at any time.  A bank can have plenty of capital, but if all bank customers demand all their deposits at once, no bank can meet that request. Silicon Valley bank had a huge proportion of their deposits above the $250,000 FDIC insurance limit as well as a huge unrealized loss on long-term treasuries caused by rising interest rates (bond prices move in the opposite direction of interest rates).  Their announcement of a capital raise to bring reserves up to regulatory requirements (including their disclosure of losses), a client base concentrated in venture capital whose businesses were also hit by higher rates and some social media posts about these issues caused huge deposit outflows that the bank could not satisfy. Fortunately, regulators stepped in quickly and assured depositors of Silicon Valley and Signature Bank of New York that all their deposits would be covered, even if above the $250,000 limit.  That seemed to stem the crisis in confidence, but regional and community banks’ stock prices are still in the doldrums.   

Inflation, which hasn’t slowed as quickly as hoped, continued to be a major concern of the Federal Reserve Board (“FRB”), which in turn makes it a concern of investors. The good news, if any, that can come out the banking crisis is that banks are likely to dial back their more marginal lending which will have the effect of decreasing investment (think commercial, industrial and home loans) and consumption which will do some of the work in slowing demand and thereby inflation that the Federal Reserve was hoping to accomplish through interest rate increases.  The FRB raised rates by 0.25% in March, a slowdown from their 0.50% raise earlier this year and several 0.75% rate increases last year. 

Bond markets also showed strong gains during the first quarter of 2023, although they’ve only recouped a small part of last year’s historic losses.  Bond yields are affected by two main components, the risk-free rate which is the yield on U.S. Treasury bills, bonds and notes, and the risk premium which is the incremental yield demanded by investors for risk of non-payment by issuing entities.  The risk-free rate piece is dictated by the Federal Reserve and when investors expect or see a slowdown or halt to rate increases, bond prices should rally. The risk premium part is predicated on bond issuers being able to pay bondholders when bonds mature and the assessment of that default risk is broadly based on economic conditions, which seem to be holding up well.  Whether the markets have properly priced in the effects of any standoff related to the debt ceiling discussion in Congress which could come to a head this summer is TBD (to be determined.)

I wish you, your families and friends a Happy and Healthy Passover and/or Easter.  I can’t tell you where the markets will go over the next few months (and run away from anyone who tells you they can!), but I can tell you with great certainty that spring is here, so had you been hibernating these last few months, get out enjoy the warmer weather.

Should you have any questions about this post or anything related to your financial life, my line is always open.

Best regards,

Steve