Equity Markets Charge Ahead Despite Short Circuits in Bonds and Banks
Sometimes, it just takes some interest rate volatility and threats to the banking system to get the
market jumping The S&P 500 rose 7.5% in the first quarter as investors piled into tech stocks
while brushing off fears of extended rate hikes. The strength of tech giants propelled the market
6.3% higher in January but the Fed’s pushback on the potential for 2023 rate cuts caused the
market to claw back 2.4% in February. The second week of March brought news of some notable
regional bank failures but the luck of St. Patty’s Day prevailed as a combo of the Fed and other
banks stepped in to prevent mass contagion Investors responded positively, pushing stocks
increasingly higher each of the following 3 weeks to end the month of March with a 3.7% gain.
After a very rough 2022 large cap tech related names came back with a vengeance led by NVIDIA
(+90%) Meta (formerly Facebook; +76%) and Tesla (+68%). The top ten stocks in the S&P
accounted for (+87%) of the quarter’s 7.5% gain. Let’s explain that another way for additional
dramatic effect Growth stocks, led by those top 10 darlings, gained over 14.4% while value
stocks barely broke even advancing only 0.9%. Value stocks were like the lazy classmate in a
group project, they didn’t hurt you but they didn’t really contribute anything either.
One of the main reasons value stocks struggled to advance was the underperformance of the
banking sector News that Silicon Valley Bank and Signature Bank were failing due to massive
bond portfolio losses sent shockwaves through the banking system It also renewed doubts of a
soft landing for the economy should rate hikes continue A change in Fed rate path expectations
also introduced volatility into the market with thoughts swinging from optimism of second half
2023 cuts to debate over whether the next hike would be 0.5% instead of 0.25%(it ended up
being the latter).
The other popular debate right now is whether the current market rally is legit The tech/growth
heavy Nasdaq composite is now 20% off its lows which technically qualifies as entering bull
market territory but perspective is needed The recent earnings season was full of lackluster
beats over extremely lowered growth expectations In fact, S&P earnings are now expected to
decline by 6% next quarter and the sectors estimated to report the worst year over year declines
are the first quarter’s market darlings, tech and communication services With this earnings
backdrop, rate path uncertainties, and still elevated inflation, the foundation to declare the end of
the current bear market still seems shaky and investors should continue to exercise appropriate
caution in navigating this market.
Fixed Income Markets Continue Volatile Movements
The 1st quarter saw a continuation of the drastic moves in interest rates that have
transpired over the last year and a half, with volatility hitting levels not seen since
2008 The beginning of the quarter was driven by strong labor numbers and sticky
inflation and the front end of the Treasury curve continued its upward trend This
came to a sharp reversal on March 10 th on the announcement of the closure of
Silicon Valley Bank The fears over the banking system and possible contagion
caused parts of the yield curve to come down dramatically, with the 2 Year
exhibiting the largest move down of 85bps (graph 1) over the last 3 weeks In fact,
the 2-year posted seven consecutive days with a yield change of greater than
20bps, both up and down A clear sign of elevated volatility and concern.
The increased volatility in interest rates also had a large impact on the shape of the
yield curve. The hawkish sentiment early in the quarter caused an already inverted
yield curve to become even more exaggerated, with the 2/10s Treasury curve
inversion hitting its largest magnitude since 1981. This continued tightening and
eventual inversion has been a trend over the last 2 years but started to show a
reversal in March and ended the quarter 50 bps steeper from peak inversion on
These concerns caused large dislocations in segments of the corporate bond
market as well. For the quarter, corporate bond spreads widened out by only 7bps
but a majority of this movement occurred after the closure of SVB and other
regional banks. Specifically, the US Banking Index gapped out by 43bps after this
date with regional banks being hit the hardest. The worries about the banking
system caused spreads on some issuers to widen out to levels not seen since the
onset of Covid in 2020 and the subsequent credit crunch.
As rates increased throughout 2022 the yield opportunities on fixed income
products became much more attractive, as evident by the yield on the Bloomberg
Barclays Aggregate peaking above 5% at points (graph 2). With the higher yield
and move down in rates, the AGG was able to deliver a return of 3.0% for the
quarter. This was the 2nd quarter in a row of a positive return and a welcome
sight considering the prior negative returns as the Fed was implementing its
substantial hiking cycle. While steps have been taken to shore up the banking
system, there are still many uncertainties regarding the economy and the path of
rates going forward We believe the importance of a high quality approach is as
important as ever in this environment.
Opinions expressed herein are subject to change.