After a challenging year in 2022, both stock and bond markets started off 2023 on a positive note. During the first quarter, U.S. large cap stocks rose by +7.5%, U.S. small cap stocks increased by +2.7%, international stocks were up +8.6% and the U.S. bond market rose by +3.0%.1
Given the strong results during the quarter, you might expect a rather smooth ascent during the first three months of the year but that was not the case. The first quarter was full of market moving headlines but none more so than then the regional bank crisis highlighted by the failure of Silicon Valley Bank and forced closure of Signature Bank. Thanks to swift actions by the Treasury and Federal Reserve potential contagion was minimized while confidence in the banking system that was temporarily lost by investors has since been largely restored. However, if you are concerned about any of your balances at banks and whether they are secure please reference our blog post on msaplan.com or click on the link below which explains FDIC insurance and what it covers.
https://www.msaplan.com/blog/what-investors-need-to-know-about-fdic-insurance-and-sipc
Inflation was also a frequent theme in headlines again this quarter as the Federal Reserve moved rates up another 0.25% at their February and March meetings to a range of 4.75% to 5.00%. Continuing the positive trend from last year headline inflation dropped to its lowest level since September 2021, 6.0% year over year. With inflation still a way off from the Federal Reserve’s target of 2.0% the path forward is uncertain with Chairman Powell at the most recent meeting saying that they do not expect to be making any interest rate cuts before the end of the year. Meanwhile bond markets are pricing in at least one interest rate cut before the end of 2023.2
Given the uncertainty that continues to influence markets, having a well-balanced portfolio is as important as ever. As an example, take the stock market returns over the past 15 months. In 2022, value stocks provided excellent downside protection (-7.5%) while growth stocks struggled (-29.1%). Market leadership shifted during the first quarter of this year as growth stocks soared (+14.4%) while value stocks produced more muted returns (+1.0%). Sentiment might also be shifting on international stocks as after four years of underperformance, international outperformed their domestic counterparts the last two quarters due to cheaper relative valuations and stronger than expected earnings. Given the constantly changing market conditions, we continue to recommend diversified portfolios that align with your long-term goals.
As always, we appreciate your trust and confidence in all of us at MSA Financial. Should you have any questions or if you would like to schedule time to review your portfolio or discuss the economic environment, please do not hesitate to contact us.
1Market segment (index representation) as follows: Domestic Large Company Stocks (S&P 500), Domestic Small Company Stocks (Russell 2000) International Stocks (MSCI EAFE), Domestic Bonds (Bloomberg Barclays US Aggregate Bond Index), Growth Stocks (Russell 1000 Growth) and Value Stocks (Russell 1000 Value)
2 https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html?redirect=/trading/interest-rates/countdown-to-fomc.html
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