Lee Walker
Senior Portfolio Manager

 We began the year with inflation subsiding, not just in the United States, but also in Europe. In addition, China reopened and there were thoughts the Federal Reserve might reverse course from aggressively hiking interest rates to cutting them before year-end. But by February, stronger-than-expected economic data had all but eliminated that possibility. Then in March, Silicon Valley Bank and Signature Bank collapsed after heavy losses in their respective bond portfolios. In addition, Credit Suisse was forced to be taken over by UBS. By quarter-end, the U.S., Australia, and Eurozone had increased interest rates, collectively, 3,300 basis points since initiating rate hikes last year. Not to be forgotten, we closed the quarter on the 401^st day of the Russia/Ukraine war.

Despite two major bank failures, all major stock indices finished in positive territory, with the S&P 500 +7.5%, the Dow +.9% and the Nasdaq up a whopping +17%. We saw a shift from 2022 behavior in that growth stocks, specifically in the technology sector, performed significantly better than value stocks this quarter. In fact, the Nasdaq had its best quarter since the second quarter of 2020 when the pandemic fueled working from home and a surge in e-commerce. Not only were domestic indices up, but international stocks finished +8.6% and emerging markets were up about 4%.

In bond markets, short yields continued rising, while mid- to long-term rates declined on the bank news.  This sharp increase in the short end of the curve was largely driven by the Fed rate hikes which pushed the borrowing rate to a range of 4.75%-5%, rates not seen since the mid-2000s. Fed rate hikes have a greater impact on the short end of the yield curve. However, the 40 bp drop in the 10-year note was indicative of the wider bond market movement which finished the quarter in positive territory at +3%.  As a reminder, prices move inversely to yields in the bond market.

James Fereday
Chief Investment Officer

Not to be left out of the volatility pattern, crude oil prices fluctuated during the quarter as well. They surged earlier in the year with the reopening of China and the prospect of increased demand. Prices then fell in March, to levels not seen since November 2021, on the heels of banking concerns and potentially dampened economic growth. However, they shook off the banking system concerns, along with stock prices, and rallied into quarter-end on the back of the announcement of OPEC+’s production cut.

It is important to note that, while we have exposure to the above-mentioned asset classes of domestic and international equities, bonds, and commodities, we have no direct holdings of the affected banks’ debt or equity. Nor do we have exposure to long-duration, below-investment grade individual bonds which contributed to the issues with the affected banks’ balance sheets. The inherent underweight to regional banks across our equity strategies has, in fact, led to strong relative performance in the financial sector.

We remain committed to our philosophy of buying high quality, appropriately valued, dividend-paying stocks in addition to duration-appropriate, investment-grade bonds. During the past 9-12 months, as rates have risen, we have added to our traditional bond exposure for the first time in many years. Our exposure to the commodity markets is well-diversified across all sectors in the space and, while growth has outperformed value so far this year, we feel confident that our philosophy will be the stabilizer in continued volatile times.

We appreciate your trust and confidence in our team and look forward to talking with and seeing you this year. Please reach out to us with questions you might have. We wish you and your families all the best as we navigate 2023.