Investments

After a period of positive performance for financial markets through the first half of 2023, both equities and traditional fixed income experienced a modest quarter of negative performance in Q3. The S&P 500 declined over 3.2% while the Bloomberg Barclays Agg Bond index similarly detracted 3.2% during Q3. The bulk of this weakness occurred during September as rapidly increasing treasury yields sent bond prices lower and spooked equity markets. 

There is a large and growing ecosystem of secondaries transactions in private markets. Secondaries transactions are the engine that drives capital market activity. For example, most people are familiar with buying stocks on a public exchange whereby they buy them from a previous owner. Buyers and sellers meet to establish a price where both parties are satisfied with the exchange and allow for money to flow across governments, banks, institutions, and individuals. These transactions are efficient, transparent, and straightforward.

The last time interest rates (as measured by the Fed Funds Effective Rate) broke above 5% was in the second half of 2006, when Chairmen Greenspan and Bernanke tried to cool the white-hot housing market and stem the flow of easy credit amidst the leveraged buy-out boom. It took the Fed about two years to move rates up 4 percent, but stocks took these hikes in stride, generating positive returns during that period.

After a painful year of negative equity & fixed income returns in 2022, markets have experienced a strong rally thus far in 2023. The S&P 500 advanced over 16% during the first half of the year as hype surrounding advances in Artificial Intelligence (‘AI’) led to significant gains for technology-oriented businesses, helping to offset negative sentiment driven by regional bank runs.

Equity markets have remained resilient so far this year, with the S&P500 index clawing back about half of its 2022 losses and the Volatility Index trending towards 2021 lows. This has been accomplished despite the country suffering a mini-banking crisis in March and government debt default concerns (which were resolved this week but chipped away at the reserve currency’s credibility), as investors focus on the light at the end of the rate-hiking tunnel, and on the better-than-expected corporate earnings through this inflationary period. After 10 hikes in 15 months, and Fed Funds at 5.25%, it looks like the financial tightening program is nearing completion, and while inflation is still high at 4.9%, the decrease from the 9% peak is welcomed.

Diversification is a foundational concept in financial planning and asset management. The objective of diversification is to spread out proverbial eggs across several baskets to increase the odds of successfully achieving long-term investment goals while reducing the chances of sharp and permanent losses of capital.

The first quarter of 2023 saw another period of elevated volatility & fluctuating market narratives. Bank runs resulting in the failure of two of the 20 largest banks in the US drove headlines for the quarter, as Silicon Valley Bank & Signature Bank were put under control of the FDIC after being strained by significant deposit outflows. Despite the two biggest bank failures since the Great Financial Crisis, both equity & fixed income markets moved higher on the quarter with the S&P 500 up 7.5% and the Bloomberg Barclays Agg Bond Index up 3%.

Chief Investment Officer, Wayne Yi, CFA, and Head of our Client Advisory Group, Tom Morr, CFP®, CAIA, discuss recent market events and investment opportunities in the current environment. We provide our thoughts on the economy and investment opportunities in a higher rate regime, particularly in light of the Silicon Valley Bank insolvency.