Portfolio Research Director, Kevin E. Donovan, CFA, and Senior Financial Adviser, Parker G. Trasborg, CFP®, discuss the events that unfolded in the first quarter of 2023 including the collapse of Silicon Valley Bank, and look ahead to the remainder of the year.

Kevin E. Donovan, CFA
Kevin E. Donovan, CFAPortfolio Research Director
Parker G. Trasborg, CFP®
Parker G. Trasborg, CFP®Senior Financial Adviser

Parker Trasborg:

Hi, my name is Parker Trasborg. I’m a Senior Financial Adviser here with CJM Wealth Advisers and again, today we have with us Kevin Donovan, our Portfolio Research Director. Kevin and I are going to chat for a few minutes about what happened in the first quarter of 2023 as far as markets.

So the big news this quarter was the failure of Silicon Valley Bank and the concerns about other regional banks here in the US. Can you shed some light about that Kevin?

Kevin Donovan:

Sure. This all happened kind of mid-March, but it’s interesting to see from a market’s point of view what happened just a couple days before this bank crisis started. So if you remember Fed Chairman Powell was testifying on Capitol Hill, I believe it was on a Tuesday. He said that he expects that the Fed is going to have to continue to increase interest rates maybe at an accelerated pace. This is not what the market was expecting because in the beginning of the year, stocks had started to rise because people thought that the Fed was close to ending its interest rate increases because the rate of inflation had been going down.

When Powell said this, it concerned investors and stocks started to sell off. Just a day or two later, this whole banking crisis blew up. So Silicon Valley Bank had a run by its depositors and it failed over the weekend. Another bank, Signature Bank, also failed. So it was a big crisis in the banking industry. But what this did from a stock investor’s point of view, it made the likelihood that the Fed would continue to increase interest rates at an accelerated rate less likely, because in order to keep a lid on this financial crisis, the Fed doesn’t want to have to continue raising interest rates.

So this led to a rethink among people about well the Fed actually may not be increasing interest rates as much as it thinks it has to. So the markets actually responded well to this whole crisis and stocks rose after falling early in that week. They rose and they rose strongly throughout the end of the quarter and we had a pretty good quarter in the markets. So let me just show you a couple… Oh sorry, go ahead.

Parker Trasborg:

Well, I was just going to note that ’22, as everyone knows, was very rough, but with stocks and bonds down double digits throughout the year, we hit the high of last year actually on January 3rd and it was pretty much downhill from there.

So yeah, why don’t you tell us a little bit more about what’s happened so far this year? It turned out bad news was good news as far as the bank crisis went.

Kevin Donovan:

Right, for everyone not invested in that bank, of course, which we had hardly any exposure to for our clients. So yeah, the first quarter of this year, mirror image from last year, and let’s look at the charts right here.

So you can see the two blue lines on the top are the S&P 500 and the International Stock Index. They were both up about 7%. So a really good quarter for those indexes. Bonds, after having historic declines last year as the Fed was jacking up interest rates, that index was up 3% in the first quarter.

But look at the bottom line there in the orange, the Dow Jones Industrial Average. That was barely positive and it was negative up until a day or two before the quarter ended. The reason for this was that the S&P was up so strongly because the large growth funds such as Apple, Microsoft, Amazon, Nvidia, these stocks make up a bulk of the S&P 500’s performance and especially its outperformance in their first quarter. So these stocks were all up double digits. Nvidia was up over 80% in the quarter and that really increased the S&P 500’s performance for the quarter.

But it wasn’t a very broad based, strong upward move in the markets, as you can tell from the Dow Jones Industrials being just barely positive. I can show this even further if we go back to this. Our next chart shows these same indexes but from the beginning of last year. So it includes all the selloff of last year and if you can see that the lines are completely flipped. So the Dow Jones Industrial Average was the best performing index since the beginning of last year. It was still down 8%, but it did much better than the S&P 500, which is down 14% over that time. So even though the S&P had a great quarter, it’s still down since the beginning of 2021. It has a lot of ground to make up to overtake the Dow since that time.

So yeah, I mean that’s kind of the story of this year versus last year. This year’s a growth stock story with the big household names in the tech industry doing so well. Last year they all did really, really poorly and value stocks such as energy stocks, financial stocks, they did well and they’re underperforming so far this year.

Parker Trasborg:

It’s kind of reminiscent of back a couple years ago when the FAANG stocks were just really driving all the growth here in the US indices. So what are we looking at going ahead here throughout the rest of 2023, Kevin?

Kevin Donovan:

Well, I mentioned that the bank crisis kind of had a positive impact on stocks in the short run at the end of the quarter. Down the line, it may not have such a positive impact. The flight of depositors from these mid-tier banks is still ongoing. Most of the deposits are going from those mid-tier banks into the larger banks. But what this may do is it may stop those mid-tier banks from lending out to their clients and it may act as a further brake on the economy.

Many economists actually are calling for a recession at the end of this year or early next year. Now they’ve been saying this ever since the Fed started increasing interest rates a year and a half ago and it keeps getting pushed down the line as to when this is supposed to start. Employment has been very strong, unemployment has been very low and that’s kind of pushed back the start date of a possible recession, but it’s still out there as a possibility. So that’s something we’re going to keep an eye on.

We’re not jumping all into the growth stock bandwagon right now. We want to keep our feet in both the growth and the value side. One of the reasons why we have a diversified portfolio is that you never know what’s going to happen. I mean, this banking crisis is a case in point. This kind of came out of the blue for markets and if you didn’t have a diversified portfolio, you might not have fared as well during that.

So the recession risk is out there. We’re not saying that we’re definitely going to have one, but we have to be aware that it is a possibility. According to the economist’s, a very strong possibility later this year and maybe early next year.

Parker Trasborg:

Similar story, as we talked about in January as well, bonds are now yielding something, so they’re a little bit more palatable to hold than what they were a couple years ago besides for diversification. So we’ll actually start to yield something there and like we mentioned before too, if the Fed has to start cutting rates, bonds are poised to do decently well still.

Thank you Kevin. I appreciate the time today. That is it for now. If anyone has any specific questions, feel free to reach out directly to your planner. Again, we are CJM Wealth Advisers. My name is Parker Trasborg. I’ve got Kevin Donovan, and we will see you next time. Thank you.

Kevin Donovan: