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First quarter earnings season is underway.  It is expected to be a poor quarter, and the bar is low heading into the announcements.  There will still be surprises and price moves, good and bad, from a very fickle market.  For example, last quarter some major stocks missed earnings but were applauded anyway for committing to cut expenses accordingly (especially Meta/Facebook).

Nothing was more emblematic of the shifting mood of the quarter than the rapid moves from the normally stable US 2-year bond, as shown below.  The 2-year moved up nearly 1% from early February to early March as the market saw stubbornly high inflation readings, opening the door for the Federal Reserve to hike rates more aggressively.  Things quickly reversed when the failure of Silicon Valley Bank created a flight to safety and the pricing in of a Fed that would have to stop or possibly reverse rate hikes.  The 2-year plummeted from a closing high of 5.07% on March 8th to a low of 3.78% on March 24th.  Rates eventually settled down around 4%.


We believe active management and careful stock, bond and asset class selection are imperative at this point in the cycle.  The bottom line is that a rising tide is no longer lifting all boats in the way it was during the era of zero interest rates.  Our commentary and probability assessments are colored by the vulnerable economic outlook that we expect will weed out weaker companies that no longer have cheap funding or a robust customer base of confident consumers or businesses.  This weeding out process will grab headlines and set the mood, but these are not the companies that we prefer even in the best of times.    Our portfolio holdings will not be immune to times of acute stress but are in large part selected for their ability to endure and grow through the cycle.  We also have a series of ideas ready to go if valuations create better entry points.

US 2-year Bond Yield


 source: WSJ.com. 4/14/23

A silver-lining of the banking crisis, if any such thing can be found, is that it should do some of the Fed’s work for them and thereby get them to at least slow down (and perhaps stop hiking) which will allow the Fed to see the lagged impacts before they overdo it and impatiently heap on even more crippling hikes.

Market Outlook and Q1 Summary

Overall Asset Allocation

We continue with a cautious stance and are underweight in equities, neutral (market weight) in fixed income and overweight to cash as dry powder for new opportunities while earning relatively attractive short-term yields in the interim.

Economic conditions will likely continue to soften.  The banking sector is still under pressure from the inverted yield curve.  Even if more major issues are avoided, lending standards are being tightened and there is just no longer as much funding to go around, at least not at favorable rates or covenant-lite terms.  This pulling back will have a dampening effect and put stress on marginal or overleveraged players.  The potential stress in Commercial real estate will also create a deflationary impulse and further negative ripple effects.  While markets often look forward opportunistically and carry on without undue worry about economics, there is always the need for an eventual reckoning and recalibration back to what economic activity means for earnings and profitability in stocks as well as creditworthiness in bonds.

Global Equities

In equities, the S&P 500 was up +7.5% for the quarter with individual sectors performing in a range of -5.6% (financials) to +21.8% (information technology).  International markets also rallied with the MSCI All Country World Index (ACWI) ex-US up +6.9% for the quarter.  We completed the process of moving client portfolios back to a neutral stance between US and international versus benchmarks.

In the US, the headline performance was generated largely by a small set of the bellwether mega cap tech/growth stocks, especially Apple and Microsoft.  This set of stocks has grown to dominate the market-capitalization weighting methodology of the index as well as become a sort of new “safety” asset for many investors given their stalwart balance sheets.

source: Strategas, 4/5/2023

Under the surface, the outlook and investor appetite are more mixed as demonstrated in the equal-weighted version of the S&P 500 only grinding out a tepid 2.5% return for the quarter with the traditional safe-haven sectors such as utilities and staples lagging. 

Equal-Weighted Version of the S&P 500 Index

source: GoogleFinance, 4/14/2023

We expect a revealing earnings season in which some companies will lower their forward guidance, either because they can no longer sidestep their challenges or because they at least opportunistically lower the bar to create an easier hurdle to cross down the road.

Fixed Income

In Q1, most bond markets were up 2-4% with long-dated US Treasuries up nearly 7%.  We are comfortable with core, investment grade fixed income at current levels, but did reduce credit risk by trimming in our satellite positions in bank loans across most portfolios.

As shown below, credit spreads are wider since early 2022 but have been relatively resilient in 2023 considering the challenging economic outlook, banking sector turmoil and related negative headlines.  We would expect to see further separation between the riskier high yield segment (red line) and the more credit-worthy investment grade segment (gray line) in the months ahead.

source: CT Research, Bloomberg; Data as of 3/31/2023


Lastly, for US Treasuries, it should not be forgotten that brinksmanship and contentious debt ceiling negotiations remain a risk to unsettle bond markets later this year.


Alternative Asset Classes 

We are monitoring commodities for a re-entry point but are not yet making that recommendation. Research continues on liquid alternative strategies to further enhance the risk-adjusted characteristics of portfolios. Currently, our only widely held alternative investment is in a US equity fund that generates additional income via call writing. Though we have no plans to directly invest in foreign currencies, we are also monitoring the US dollar and its recent weakness for what that might signal in terms of headwinds or tailwinds for multinational companies and other global relative value opportunities such as commodities and gold.


We are confident for the long-term, but in the short-term remain cautious and patient.  Portfolios have moderate cash buffers in place and room to dial up exposures as opportunities arise.  The consumer, the labor market, retail sales and manufacturing are starting to show cracks.  The stock market will look forward and across to the other side of the storm, but we are not convinced we are yet far enough into the storm to start adding more risk exposure.  However, we do balance our view by acknowledging that in some respects this is the “most anticipated recession of all-time” and therefore some portion of bad news is already reflected in prices after last year’s sell off.