Despite a large amount of negative news in the headlines during the quarter, including turmoil in the banking sector highlighted by the failure of Silicon Valley Bank and the collapse of Credit Suisse, 2023 started strongly across major asset classes. Stocks and bonds, both domestically and abroad, extended their rebound from last year’s third-quarter lows.
After moving with historic speed last year, the Federal Reserve has slowed the pace of federal funds rate hikes, raising the rate by just 0.25% at both of their meetings this year. The labor market overall has remained tight, with unemployment running at 3.5% while inflation has been trending in the right direction.
Relative to where the year started, the market view has shifted, with expectations that we may be approaching the end of this tightening cycle earlier than most anticipated. This led to yields dropping (and prices increasing) for bonds with maturities greater than one year.
With very few exceptions, stocks globally posted positive absolute returns. Developed international stocks slightly outpaced the US. While emerging markets also generated positive absolute returns, they lagged developed market counterparts during the quarter.
The US market generated a 7% return, with wide dispersion among styles. While value stocks led in 2022, the reversal in the first quarter favored large cap growth stocks, bringing the returns over the past year much closer among styles. Over the past year, REITs have been particularly weak with their sensitivity to rising interest rates and office vacancy headwinds.
The continued rebound was seen across geographies, with an 8.5% return for developed international markets. Emerging markets gained 4%. Over the past year, emerging markets have faced the most headwinds internationally, while developed markets are nearly flat for the period.
As noted, the shift in expectations of how high and how long the federal funds rate will remain high (before potentially being lowered), drove positive returns across fixed income funds. Apart from the shortest part of the yield curve, rates fell across sectors. The US Aggregate Bond Index and international bonds (AGG ex-US) both appreciated roughly 3% for the quarter. Over the past year, corporate bonds have trailed slightly as investors weigh risks of increased borrowing costs and slower economic activity.
For this quarter, we wanted to share two illustrations that we found helpful, both of which came from BlackRock’s research team.
The first is a backward-looking analysis that helps to put 2022 into context. BlackRock looked at positive and negative returns by asset class (using Morningstar Categories) for each calendar year since 1990. There are 112 different asset classes in their hierarchy (e.g., large cap growth, small cap value, short bonds, long bonds, etc.) In hindsight, when it felt like there was really “no where to hide” in 2022, that is because there wasn’t. 94% of asset classes were negative. While not unprecedented in history, with a matching result during the Global Financial Crisis, the chart does help us understand the rarity of such a year.
When the next year like 2022 will arise is anyone’s guess, but understanding that they can happen can help us be better investors and more prepared. At least within the data we have historically, these periods have been short-lived with the benefits of diversification returning quickly.
The second illustration puts the current period into a historical framework. While no two cycles are exactly the same, history suggests that on average, returns for both stocks and bonds can be quite strong after a period of peak inflation. It appears that the US hit that peak back in June of 2022. From then through March, the Aggregate Bond Index is virtually flat, and the S&P 500 has gained about 10%.
The message here for investors is really about the forward-looking nature of markets. Market returns tend to come well in advance of the data actually getting to desired levels, as investors across the globe seek to anticipate the direction, changes, and long-term implications of data trends. Similar research has been completed on recessionary periods, where similarly, the market often recovers well before the data supports a return to economic growth.
Each quarter, Collective Wealth Planning, with the help of our investment partner First Ascent Asset Management, provides transparency and seeks to clearly communicate what is driving performance for portfolios. However, as long-term investors we believe it is important to note that any single period (especially a period as short as a quarter) can be skewed or limited in informational value and stress the importance of the longer-term perspective on portfolio positions.
Investments are not guaranteed and are subject to investment risk, including possible loss of the principal amount invested. Past performance is no guarantee of future results. All allocations and opinions expressed are as of the date of this presentation and subject to change. The information contained herein does not constitute investment advice or a solicitation. Information obtained from 3rd parties is believed to be accurate, but has not been independently verified.