Stocks saw major dispersion in the first quarter of 2023, with the Nasdaq rallying 17.1% for its best quarter since 2020.Meanwhile, Large Value lagged (+1.0%), primarily due to underperformance in Financials, which were down (-5.6%). Small Caps (+2.7%) also lagged, as Financials make up a larger percentage of the Russell 2000 Index versus the S&P 500. Overall, the S&P 500 finished the quarter up 7.5%.As shown below, five of the best seven performing stocks in the S&P 500 were in the Tech sector, while six of the seven worst performing stocks were in the Financial sector.
Historically a strong first quarter bodes well for the remainder of the year.Since 1950, when the S&P 500 gained over 7% in the first quarter, the full year has never been negative.
The Story of Q1 2023: Banking Crisis
It’s not unusual for a Tightening Cycle to result in a Financial Crisis.In response, the Fed has historically either Eased or Paused.In some instances, a Recession was avoided (i.e. 1984 Failure of Continental Illinois), while other times a Recession quickly followed (i.e. Global Financial Crisis).In the past, a financial shock/crisis has never ended until the Fed paused or cut rates.
The Fed’s response to the recent Banking Crisis is highly unusual, as the Fed hiked rates 25 basis points in March and continued Quantitative Tightening.Prior to the Banking Crisis, markets were pricing in a 50 basis point hike, but financial stability took precedence over price stability. The Fed continues to be in a difficult position of trying to battle high inflation while also managing a crisis in the Regional Banking system. Dynasty believes the Fed is nearing the end of its tightening cycle, especially with a deep inversion of the yield curve.
Major Takeaways from the Banking Crisis
Most Banks don’t have the level of uninsured deposits as a SVB, or the crypto exposure of a Signature Bank.
It’s important to note the government guaranteed all deposits for SVB and Signature Bank because they were in receivership and deemed a “systematic risk exception.”
Over the past two weeks, Banks have seen their deposits decline by a record $300 Billion.After SVB went under, some deposits that left Small Banks went into Large Banks.Other deposits moved to higher yielding Money Market Funds, with a record $5.2 Trillion in these funds (see Chart #1).
To improve liquidity and stability, Banks utilized the Fed’s Discount Window and the Fed’s newly established Bank Term Funding Program (BTFP).Both allow Banks to borrow short-term loans from the Fed by providing collateral (i.e. Government Bonds) at Face Value, regardless of market price.This resulted in the biggest surge in borrowing using the Discount Window since 2008 (see Chart #2).
Usage of the Fed’s Facilities resulted in a jump in the Fed’s Balance Sheet by $300 Million, despite QT.
The Dodd-Frank Act tried to reduce concentration among Banks, but we expect further consolidation now.
According to Apollo, tighter financial conditions and lending standards equates to an additional 150 basis points in the Fed Funds Rate.Already, Bank Lending has plummeted (see Chart #3).
Financial Crises are Part of Tightening Cycles
It’s not unusual for a Tightening Cycle to result in a Financial Crisis. In response, the Fed has historically either Eased or Paused. In some instances, a Recession was avoided (i.e. 1984 Failure of Continental Illinois), while other times a Recession quickly followed (i.e. Global Financial Crisis). In the past, a financial shock/crisis has never ended until the Fed paused or cut rates.
The Fed’s response to the recent Banking Crisis is highly unusual, as the Fed hiked rates 25 basis points in March and continued Quantitative Tightening. Prior to the Banking Crisis, markets were pricing in a 50 basis point hike, but financial stability took precedence over price stability. The Fed continues to be in a difficult position of trying to battle high inflation while also managing a crisis in the Regional Banking system. Dynasty believes the Fed is nearing the end of its tightening cycle, especially with a deep inversion of the yield curve.
Equities Historically Rally After the Last Fed Hike
In March, the Fed raised rates to a range of 4.75-5.00% and released its updated “Dot Plot,” which showed a majority of FOMC participants forecasting just one additional rate hike in 2023.The market continues to price in a much different outlook for rates, with expectations of multiple rate cuts in the second half of 2023.
In looking at the past 30 years (going back to 1994), there have been five prior rate hiking cycles – including the current cycle.In the prior four cycles, equities rallied after the last rate hike except in 2000 during the Tech Bubble.The end of the current rate hiking cycle could be bullish for equities.
The Bond Market Continues to Signal Warning Signs
In March, the Fed raised rates to a range of 4.75-5.00% and released its updated “Dot Plot,” which showed a majority of FOMC participants forecasting just one additional rate hike in 2023.The market continues to price in a much different outlook for rates, with expectations of multiple rate cuts in the second half of 2023.
In looking at the past 30 years (going back to 1994), there have been five prior rate hiking cycles – including the current cycle.In the prior four cycles, equities rallied after the last rate hike except in 2000 during the Tech Bubble.The end of the current rate hiking cycle could be bullish for equities.
Markets were previously pricing in a peak Fed Funds Rate above 5.50% on March 8th.After the collapse of Silicon Valley Bank, the market quickly shifted to expecting multiple rate cuts.To end the quarter, the market now expects rates to finish 2023 at 4.25%.
Short-Term Yields also plunged in response to the Banking Crisis.At one point in mid-March, the 2-year yield sank over 100 basis points in less than two weeks.
The 10yr-3month curve is at its most inverted level (-160 bps) since the early 1980s.Historically if there is a Recession, it is preceded by the steepening of a yield curve that was deeply inverted.
Major Takeaway
The Equity and Fixed Income markets continue to price in radically different outlooks. Equity markets have largely shrugged off the Banking Crisis to finish Q1 up 7.5%, which historically is bullish for the remainder of the calendar year. Seasonality Trends and a Third Year of a Presidential Cycle are also bullish for equities. The Fixed Income market, however, continues to flash warning signs of a Recession, from collapsing Treasury yields to severely inverted yield curves.
Important Disclaimers and Disclosures
Rose Capital Advisors, LLC is registered as an investment adviser with Securities and Exchange Commission (“SEC”). Rose Capital Advisors, LLC only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. This report is a publication of Dynasty Financial Partners. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.
Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professional adviser should be consulted before implementing any of the strategies or options presented. *Information is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), or product made reference to directly or indirectly, will be profitable or equal to past performance levels.
Rose Capital Advisors clients – please contact us at 305.534.7673 if there have been any changes in your financial situation or investment objectives, or if you want to implement reasonable restrictions and/or modify existing restrictions. All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark.
Dynasty Financial Partners is a U.S. registered trademark of Dynasty Financial Partners, LLC (“Dynasty”). Dynasty is a brand name, and functions through Dynasty’s wholly owned subsidiary, Dynasty Wealth Management, LLC, (“DWM”) a registered investment adviser with the Securities and Exchange Commission, when providing investment services. Any reference to the terms “registered investment adviser” or “registered” does not imply that Dynasty or any person associated with Dynasty has achieved a certain level of skill or training. A copy of DWM’s current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This message is intended for the exclusive use of members or prospective members considering joining the Dynasty Network of registered investment advisers. It should not be construed as an attempt to sell or solicit any products or services of Dynasty, DWM or any investment strategy, nor should it be construed as legal, accounting, tax or other professional advice.
This material is proprietary and may not be reproduced, transferred, modified or distributed in any form without prior written permission from Dynasty. Dynasty reserves the right, at any time and without notice, to amend, or cease publication of the information contained herein. Certain of the information contained herein has been obtained from third-party sources and has not been independently verified. It is made available on an “as is” basis without warranty. Any strategies or investment programs described in this presentation are provided for educational purposes only and are not necessarily indicative of securities offered for sale or private placement offerings available to any investor.
The views expressed in the referenced materials are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance; actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
Historical performance results for investment indices and/or product benchmarks have been provided for general comparison purposes only, and do not include the charges that might be incurred in an actual portfolio, such as transaction and/or custodial charges, investment management fees, or the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.
Recap of Q1 2023: Size Mattered
Stocks saw major dispersion in the first quarter of 2023, with the Nasdaq rallying 17.1% for its best quarter since 2020. Meanwhile, Large Value lagged (+1.0%), primarily due to underperformance in Financials, which were down (-5.6%). Small Caps (+2.7%) also lagged, as Financials make up a larger percentage of the Russell 2000 Index versus the S&P 500. Overall, the S&P 500 finished the quarter up 7.5%. As shown below, five of the best seven performing stocks in the S&P 500 were in the Tech sector, while six of the seven worst performing stocks were in the Financial sector.
Historically a strong first quarter bodes well for the remainder of the year. Since 1950, when the S&P 500 gained over 7% in the first quarter, the full year has never been negative.
The Story of Q1 2023: Banking Crisis
It’s not unusual for a Tightening Cycle to result in a Financial Crisis. In response, the Fed has historically either Eased or Paused. In some instances, a Recession was avoided (i.e. 1984 Failure of Continental Illinois), while other times a Recession quickly followed (i.e. Global Financial Crisis). In the past, a financial shock/crisis has never ended until the Fed paused or cut rates.
The Fed’s response to the recent Banking Crisis is highly unusual, as the Fed hiked rates 25 basis points in March and continued Quantitative Tightening. Prior to the Banking Crisis, markets were pricing in a 50 basis point hike, but financial stability took precedence over price stability. The Fed continues to be in a difficult position of trying to battle high inflation while also managing a crisis in the Regional Banking system. Dynasty believes the Fed is nearing the end of its tightening cycle, especially with a deep inversion of the yield curve.
Major Takeaways from the Banking Crisis
Financial Crises are Part of Tightening Cycles
It’s not unusual for a Tightening Cycle to result in a Financial Crisis. In response, the Fed has historically either Eased or Paused. In some instances, a Recession was avoided (i.e. 1984 Failure of Continental Illinois), while other times a Recession quickly followed (i.e. Global Financial Crisis). In the past, a financial shock/crisis has never ended until the Fed paused or cut rates.
The Fed’s response to the recent Banking Crisis is highly unusual, as the Fed hiked rates 25 basis points in March and continued Quantitative Tightening. Prior to the Banking Crisis, markets were pricing in a 50 basis point hike, but financial stability took precedence over price stability. The Fed continues to be in a difficult position of trying to battle high inflation while also managing a crisis in the Regional Banking system. Dynasty believes the Fed is nearing the end of its tightening cycle, especially with a deep inversion of the yield curve.
Equities Historically Rally After the Last Fed Hike
In March, the Fed raised rates to a range of 4.75-5.00% and released its updated “Dot Plot,” which showed a majority of FOMC participants forecasting just one additional rate hike in 2023. The market continues to price in a much different outlook for rates, with expectations of multiple rate cuts in the second half of 2023.
In looking at the past 30 years (going back to 1994), there have been five prior rate hiking cycles – including the current cycle. In the prior four cycles, equities rallied after the last rate hike except in 2000 during the Tech Bubble. The end of the current rate hiking cycle could be bullish for equities.
The Bond Market Continues to Signal Warning Signs
In March, the Fed raised rates to a range of 4.75-5.00% and released its updated “Dot Plot,” which showed a majority of FOMC participants forecasting just one additional rate hike in 2023. The market continues to price in a much different outlook for rates, with expectations of multiple rate cuts in the second half of 2023.
In looking at the past 30 years (going back to 1994), there have been five prior rate hiking cycles – including the current cycle. In the prior four cycles, equities rallied after the last rate hike except in 2000 during the Tech Bubble. The end of the current rate hiking cycle could be bullish for equities.
Markets were previously pricing in a peak Fed Funds Rate above 5.50% on March 8th. After the collapse of Silicon Valley Bank, the market quickly shifted to expecting multiple rate cuts. To end the quarter, the market now expects rates to finish 2023 at 4.25%.
Short-Term Yields also plunged in response to the Banking Crisis. At one point in mid-March, the 2-year yield sank over 100 basis points in less than two weeks.
The 10yr-3month curve is at its most inverted level (-160 bps) since the early 1980s. Historically if there is a Recession, it is preceded by the steepening of a yield curve that was deeply inverted.
Major Takeaway
The Equity and Fixed Income markets continue to price in radically different outlooks. Equity markets have largely shrugged off the Banking Crisis to finish Q1 up 7.5%, which historically is bullish for the remainder of the calendar year. Seasonality Trends and a Third Year of a Presidential Cycle are also bullish for equities. The Fixed Income market, however, continues to flash warning signs of a Recession, from collapsing Treasury yields to severely inverted yield curves.
Important Disclaimers and Disclosures
Rose Capital Advisors, LLC is registered as an investment adviser with Securities and Exchange Commission (“SEC”). Rose Capital Advisors, LLC only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. This report is a publication of Dynasty Financial Partners. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.
Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information. A professional adviser should be consulted before implementing any of the strategies or options presented. *Information is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that the future performance of any specific investment, investment strategy (including the investments and/or investment strategies recommended by the adviser), or product made reference to directly or indirectly, will be profitable or equal to past performance levels.
Rose Capital Advisors clients – please contact us at 305.534.7673 if there have been any changes in your financial situation or investment objectives, or if you want to implement reasonable restrictions and/or modify existing restrictions. All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment-management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or outperform any particular benchmark.
Dynasty Financial Partners is a U.S. registered trademark of Dynasty Financial Partners, LLC (“Dynasty”). Dynasty is a brand name, and functions through Dynasty’s wholly owned subsidiary, Dynasty Wealth Management, LLC, (“DWM”) a registered investment adviser with the Securities and Exchange Commission, when providing investment services. Any reference to the terms “registered investment adviser” or “registered” does not imply that Dynasty or any person associated with Dynasty has achieved a certain level of skill or training. A copy of DWM’s current written disclosure statement discussing our advisory services and fees is available for your review upon request.
This message is intended for the exclusive use of members or prospective members considering joining the Dynasty Network of registered investment advisers. It should not be construed as an attempt to sell or solicit any products or services of Dynasty, DWM or any investment strategy, nor should it be construed as legal, accounting, tax or other professional advice.
This material is proprietary and may not be reproduced, transferred, modified or distributed in any form without prior written permission from Dynasty. Dynasty reserves the right, at any time and without notice, to amend, or cease publication of the information contained herein. Certain of the information contained herein has been obtained from third-party sources and has not been independently verified. It is made available on an “as is” basis without warranty. Any strategies or investment programs described in this presentation are provided for educational purposes only and are not necessarily indicative of securities offered for sale or private placement offerings available to any investor.
The views expressed in the referenced materials are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward‐looking statements. Please note that any such statements are not guarantees of any future performance; actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.
Historical performance results for investment indices and/or product benchmarks have been provided for general comparison purposes only, and do not include the charges that might be incurred in an actual portfolio, such as transaction and/or custodial charges, investment management fees, or the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.
“The Fed Begins Cutting Rates in September” The Fed cut interest rates in September for...
“Recent Divergence in Magnificent 7 will Continue” Entering 2024 we expected divergence in Big Tech...
What we Got Right: “Valuations Remain Attractive for US Equities” Valuations remained attractive for small...
Michael has been providing strategic investment advice and wealth management services for over 24 years.
View Full BioAs a Financial Advisor, Ashley works closely with high net worth individuals and families with a niche focus on female executives and entrepreneurs.
View Full Bio