Equities continued their “march” higher through March with the S&P 500 Index hitting a high on the 28th at 5,254. As of this writing in mid-April, things have cooled a bit, as the drivers behind the market strength have evolved. Artificial Intelligence was the reason for much of the market’s strength in 2023, despite the short list of clear (and investible) beneficiaries.

The year was a surprise both in terms of the market’s performance and that of the economy. Most, including us, expected some form of a recession. Our thinking a year ago was that the headwinds were too clear and too many to avoid a slowdown, and frankly that is what was needed to rein in inflation, which at the time was more than 5%¹.

In many ways, the markets in 2023 have been a reversal of 2022. Utilities, healthcare, and consumer staples, which were last year’s winners, have given ground to the homebuilders, semiconductors, and bitcoin, which were last year’s dogs. The volatility happening in the equity markets is occurring while the bond market’s total return is negative again, after its historic losses in 2022.

Speculative growth stocks and mega-cap tech companies which are now being called the “Magnificent Seven” have bounced back after a dismal 2022. We still view this as a tough market overall as corporate earnings decline, valuations are not broadly attractive, and there are more investable alternatives than in years past, i.e., Treasury bills.

So what happened in the market during Q1? Well, it was a bit of a reversal of what occurred in 2022. The “slowing” mentioned about (inflation and profits) coupled with the banking stress triggered a drop in interest rates which helped boost bond and gold prices and growth stocks.

Stocks bounced and bonds rallied in the fourth quarter to close out the year with a less bad taste in everyone’s mouth. Each year is different and remarkable in its own way, but 2022 will always be remembered for the change in interest rates and the Fed’s 425 basis points of hikes.

The markets were unfriendly to almost everyone during the third quarter with the S&P 500 closing at the low for the year on Friday the 30th. Bear markets in the stock market are normal and sometimes happen without much headline attention.

Parts of the economy are clearly slowing because of the higher interest rates and inflationary pressures. Typically, when this happens bonds are the place to seek shelter, especially Treasury securities.

Over the course of 2021 and even into 2022, we added to our commodity holdings within our managed strategies, which has proved helpful as commodity-oriented stocks have performed well.

This was one of the worst quarters for bonds in the past 40 years. Typically, when bonds sag, stocks rise and vice versa, but both asset classes dropped this quarter, highlighting the broader financial system’s sensitivity to higher rates.

It was a down quarter across the board, but each of our managed strategies finished the second quarter ahead of their respective benchmark. Our higher cash positions have helped, but what we have been calling our “pro-inflationary” and cyclical positioning within the portfolios gave up some ground in June.

We finished 2021 on a high note with each of our managed strategies rising in December, capping off a solid year of gains. While we can always provide you with a summary of performance for your specific account, we are also happy to share with you the Fact Sheets and performance for any of our managed strategies.

Amplified by the pandemic, but facilitated by the Federal Reserve, we have seen several major speculative runs in various assets over the past two years. Some of these rallies have inspired both pros and commentators to toss around the “bubble” word. Unlike some of the more familiar or recent market bubbles (internet stocks in ’00, housing in ’06), the growing list of possible bubbles has led to the phrase “the everything bubble”.

We held more cash during the quarter, as we have been concerned with how the market would respond to a shift in Fed policy, and we expect some disappointing news when earnings season comes around given the continued supply chain issues and pricing pressures. This proved to be helpful during the 3rd quarter as volatility perked up and the indices drifted lower in September.

The S&P 500 posted its second-best, first half gain in more than 20 years as both large and small cap stocks rose for a fifth consecutive quarter in Q2. Vaccine traction seemed to be the biggest driver to the rising investor sentiment as life began to feel more normal for more Americans.

“Up and to the right” is a phase used in this business to describe a market or stock that rises consistently over time. For the past few months, it has been more of just an “up” market, and it has happened fast! Markets are doing what they always do, front running the actual economy, and generally following expectations and other leading indicators of future growth.

The markets have been on a strong run for the past decade. The recovery last year was remarkable and at times hard to reconcile given the economic fallout caused by the pandemic.

An incredible year in the market was wrapped up with an incredible quarter, which included the best single month EVER in both the Russell Small Cap Index and the Large Cap Value index.