26 Apr Bridge Perspective – April 2023
Take It To The Bank
As we discussed in our January newsletter “The level of support the Federal Reserve provided to the markets and our economy in 2020 and 2021 was unprecedented, and the withdrawal of this support and its effect on the markets is a significant unknown.” One effect we have since learned is deposits at U.S. banks surged in 2022 and many of these institutions chose (or were encouraged by regulations) to invest the funds in long-term U.S. treasury bonds. Unfortunately, due to the requirement of banks to “mark to market” their securities, these bonds’ repricing caused many banks to show deteriorating balance sheets and subsequently, significant withdrawals (“a run”), and ultimately led to several bank failures. While we do not know whether these banking issues are contained, or when these issues will be resolved, typically history has shown that once a bank run starts, it is very difficult for it to stop without significant damage to the economy. We are watching closely as continued Fed policy rate hikes will impact banks financial stability and could cause additional banks to fail or require further liquidity from the Fed itself. The irony isn’t lost on us that while the Fed is raising rates to stamp out inflation, it is consequently causing increased financial stress to our banking system, resulting in over $300 Billion in loans made from its own “discount window” to help shore up banks and their balance sheets. Certainly, a larger question looms of what other financial institutions may be exposed to banks with solvency issues and if this crisis truly is contained, as we are being told.
Equity and Fixed Income Markets
Despite the banking issues that have developed, the S&P 500 index finished the quarter up 7.5%. The MSCI World ex-USA Index, which represents large, mid-size and small companies across developed (Europe, Japan) and emerging (Asia, Latin America, Middle East) markets finished the quarter up 8.02%. The MSCI Emerging Markets Index was up 3.96% for the quarter. Large growth stocks which suffered in 2022 were up the most in the first quarter of 2023 at 14.37% vs. large value stocks were up 1.01%. The information technology sector was the best performer for the quarter, being up 22% while the financial sector was the weakest and down 6% for the quarter.
The real estate sector, which experienced a sharp selloff in both the S&P Dow Jones US Real Estate index and Global Real Estate index in 2022 was slightly positive in the first quarter with a gain of 1.37% in the S&P Global REIT Index. While commodities were the best performing sector in 2022, the Bloomberg Commodity Total Return Index was down 5.36% for the quarter. The primary contributor to the negative performance was natural gas, which was down 50.99%. The best performers were sugar up 18.87%, Copper up 7.09% and Gold up 6.84%.
Similar to the generally positive equity markets, the Bloomberg U.S. Aggregate Bond Index was up 2.96% and the Bloomberg Global Aggregate Bond Index was up 3.01% for the quarter.
Another area to watch carefully are the currency markets, especially the U.S. dollar. The U.S. dollar did extraordinarily well in 2022 but there are indications that the dollar is losing favor amongst the developing economies. Since 1971, the Petrodollar or Eurodollar as some refer to it, has acted as the world’s reserve currency and used by over 90% of the global trading markets. Currently, there are now dozens of countries establishing trade pacts using either their own currency or BRICSs (Brazil, Russia, India, China, South Africa) currencies such as the Chinese Yuan. Our view is that a number of countries may have already backed their currencies with gold or other physical assets to allow stability within these new trading partnerships.
We will continue to monitor the markets and make prudent changes when we have sufficient data to support our decisions.
A Few Thoughts for 2023
The news headlines and volatility we experienced in the first quarter of 2023 remind us that uncertainty in the markets is the nature of markets. For most investors, a successful outcome typically results from having a robust and periodically reviewed financial plan and a broadly diversified portfolio managed by a professional. The uncertainties we faced in 2022 will continue and eventually evolve into new risks; our goal is to help you successfully navigate through these troubled waters.
NOTES AND DATA SOURCES
- Article adapted from Avantis Investors Monthly ETF Field Guide
- Index returns provided by Avantis Investors and Dimensional Fund Advisors
- Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio.
Bridge Advisory LLC Disclosures
Bridge Advisory, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Investment Advisory Services offered through Bridge Advisory, LLC.
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type. Past performance is not a guarantee of future results. Indices are not available for direct investment. Index performance does not reflect the expenses associated with the management of an actual portfolio. Information herein has been obtained from sources believed to be reliable, but Bridge Advisory, LLC. does not warrant its completeness or accuracy; opinions and estimates constitute our judgment as of this date and are subject to change without notice. This newsletter expresses the views of the authors as of the date indicated and such views are subject to change without notice.