The financial markets’ resilient performance during March was striking, despite pockets of uncertainty surrounding the strength of the economy—and not to mention concerns over the durability of the banking system. The ability of the market to navigate nearly two weeks of headline-related risk tested the underlying resolve of the market’s capacity to look ahead.
According to The Conference Board, consumer confidence inched slightly higher during March, reflecting a solid labor market with an unemployment rate of 3.6%—the lowest it has been in over 50 years. In addition, the National Association of Home Builders (NAHB) confidence index continued to climb higher in March, representing the third straight month of improvement. With mortgage rates tilting lower, sales of new homes began to pick up during the month, and many industry experts were commenting that the housing market may be on the cusp of “bottoming out.”
Certainly, the strains in the banking system jolted investor confidence and the market’s positive trajectory, but the quick response from government agencies—particularly the Fed’s lending facility, designed to help banks shore up their balance sheets quickly—helped restore calm in the market. Fed Chairman Jerome Powell echoed the reassuring words of many officials in the U.S. and abroad when he said the U.S. banking system “is sound and resilient with strong capital and liquidity,” and that “deposits are safe.”
Helping to further strengthen support in the country’s financial infrastructure, and ease investor anxiety, was the headline that First Citizens Bank would purchase “all of the deposits and loans” of Silicon Valley Bank, the bank that collapsed quickly and ignited a stretch of fear and panic across financial markets. With the private sector showing the value it sees in the ailing bank, we saw renewed optimism and faith in the overall banking system, and markets in general. First Citizens share price climbed 53% on the first trading day following the announcement, demonstrating the market’s confirmation that the deal made sense—and that the banking sector is safe.
Market & Portfolio
Overall, patience and perseverance was rewarded as markets continued to factor in an increasingly realistic scenario of lower interest rates and a weaker U.S. dollar, which helps U.S. exporters compete in the global marketplace and helps soften overall financial conditions globally. It’s also important to keep in mind that it’s very rare for markets to suffer negative returns two years in a row. The unwinding of the technology bubble and the financial crisis that began in 2008 witnessed successive years of negative performance, but they represent anomalies.
• The first quarter saw a resurgence of the mega-cap companies that lead the market during the last bull market. Nearly 90% of the S&P 500’s first quarter gain was driven by 10 stocks (all tech or tech-related). This could be seen as a rebound from the 30% decline technology had in 2022.
• Interest rates came down in March from a rise to start the year, shorter rates fell more dramatically than the long end.
• Developed international markets have outperformed US markets YTD.
We are maintaining our overweight position in value sectors as we believe the resurgence of mega-cap stocks and technology was limited to a bounce from the 2022 sell-off. The environment remains more favorable for companies that operate strong balance sheets and have an ample amount of cash-flow than those that must use debt to finance operations and growth. Interest rates remain much higher compared to the last bull market and the banking worries have quickly tightened lending standards.
In the fixed income portfolio, the star of the show has been emerging market debt. This sector performs well during a weakening US dollar which we have seen to start the year. Our long-term treasury position has captured the pullback in interest rates and continues to serve as a hedge against a weakening economy. We are currently evaluating swapping the long-term treasury for an intermediate treasury to capture the move in interest rates while still providing a hedge against a weak economic outlook.
Looking Ahead
The sound foundation of our financial system corroborates our constructive optimism of the upward and long-run trend of markets, despite headlines designed to jar nerves and test our steadfast resolution. As always, please reach out to me with any questions.
Sincerely,
Jason Velencia
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. Investing includes risks, including fluctuating prices and loss of principal. No strategy assures success or protects against loss. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
