Quarterly Market Update Q1 2023
The first quarter was marked by meaningful volatility as investor sentiment turned from early cheer to fear over concerns about stubbornly high inflation and a continued hawkish Federal Reserve rate policy that spurred a banking crisis. Notwithstanding these concerns, U.S. equity markets posted positive returns for the first three months of 2023. The S&P 500 TR Index advanced 7.5% and the tech-heavy Nasdaq Composite Index increased 16.6%, while the Dow Jones Industrial Average (DJIA) was flat. International equities also posted positive returns with the MSCI EAFE Index advancing 7.2% for Q1 2023. Fixed income securities similarly posted positive returns with the Bloomberg U.S. Intermediate Aggregate Bond Index increasing 2.4% in Q1 2023. However the U.S. 10-year Treasury decreased from 3.9% at the start of the quarter to 3.5% as of March 31.
The U.S. equity markets advanced largely on the back of the Information Technology sector. After having taken a beating in 2022, the technology sector led the way, advancing early in the quarter and continued to advance after the onset of the regional banking crisis in the U.S. In fact, the S&P 500 Information Technology sector posted a 21.5% return in the first quarter. Leading the pack were NVIDIA Corporation, Meta Platforms and Tesla, which all advanced more than 65% in the quarter.
Valuations for technology stocks meaningfully contracted in 2022 as discount rates increased with a higher interest-rate environment and access to capital becoming more constrained than in the past. Ostensibly, this has resulted in numerous technology companies reducing overall operating expenses and focusing on nearer-term profitability, as highlighted by the sizeable headcount reductions announced by a number of tech companies, including Twitter, Meta Platforms and Amazon, to name a few. While we believe this focus on profitability and capital allocation makes certain companies in the sector incrementally more attractive, Evolve’s investment philosophy leads us to companies that trade at more reasonable valuations than those in the Information Technology sector. Additionally, at Evolve, our investment approach focuses on financially healthy companies that are profitable and able to compound their earnings over the full business cycle.
Even though macro uncertainty remains elevated, equities continue to present attractive returns for investors over time. From a valuation standpoint, the S&P 500 is trading at 17.9 times forward 12-months earnings, down from 21.6 times at the beginning of 2022. This is slightly above its 10-year average of 17.3 times. Consequently, we believe that equities remain attractive and are crucial to a well-balanced portfolio.
Even though inflation looks to have peaked, it remains stubbornly high. The Fed’s job has become increasingly more difficult as it walks a tightrope: trying to tame inflation while potentially pushing the economy into a recession and further disrupting the financial system. In late March, the Federal Reserve raised the benchmark federal funds rate a ninth time by 0.25%, bringing the range to between 4.75% and 5%, its highest level since September 2007. However, the Fed indicated that it may pause further increases given the potential for lending pullbacks following the shuttering of two regional banks—Silicon Valley Bank and Signature Bank—and the decision to bail out uninsured deposits at these banks.
The higher interest-rate environment has made fixed income incrementally more attractive vis-a-vis other asset classes. Persistently high inflation and the current hawkish stance by the Fed could result in further downside; however, we believe that upside outweighs downside risk.
Money-market funds have also experienced significant inflows given the current interest-rate environment. Since money-market funds hold highly liquid debt securities, they are considered a proxy for cash and their yields broadly track interest rates. As at the end of the quarter, the current yield on a money-market fund is 4.6%, up from 0.02% at the beginning of 2022. This higher yield makes money-market funds attractive in the context of a broader portfolio and can augment returns on cash holdings.
Overall, we remain bullish on the U.S. economy longer term, notwithstanding the current uncertain economic environment. We continue to believe equities offer the most upside potential and should command an enduring role in investors’ portfolios, while fixed income has become more attractive given the prevailing interest-rate environment.
To learn more about Evolve Wealth Advisors LP, please visit our website at www.evolvewealthadvisors.com. Should you have any questions regarding your account or how Evolve Wealth Advisors can help with your future Estate or Retirement planning needs, please contact Peter Henry, CEO at 818-970-6940 or Patrick Kinney, COO at 503-490-0273.
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