2023 2nd Quarter Investment Bulletin
Executive Summary
U.S. Stocks increased 7% during the first quarter continuing an upward trend that has been in place since October. In fact, U.S. stocks have rallied more than 14% in the last six months.
Despite continued Fed rate hikes and a couple of well-publicized bank failures, interest rates declined, and bond prices rose leading to gains in the bond market of more than 3%.
Reversion to the mean continues to be a force in markets, leading to the losers from last year becoming the winners of 2023. This is most apparent in the reversal of value and growth stocks, as well as short-term and long-term bonds.
The failure of Silicon Valley Bank and Signature Bank put pressure on banks leading to a greater awareness of FDIC protection limits and overall financial safety.
Mean Reversion
As previously mentioned, the beginning of 2023 has seen a sharp reversal in leadership in the stock market. All through 2022, growth stock prices declined while value stocks fared significantly better. From the start of the year, the market has been pushed higher by beaten down growth stocks, while at the same time dividend paying stocks and value-oriented stocks have lagged considerably. Another reversal has taken place in the bond market, long-term bonds have rallied strongly while short-term bonds have moved only slightly higher.
This is a reminder that the constant in markets is that the trend changes. It is the reason that it is so important during rebalancing maneuvers to be willing to buy the beaten-down sectors, and to incrementally sell the strongest sectors during rising markets.
Bank Failure & Financial Safety
Beginning the week of March 6th, the losses housed on bank balance sheets started to worry the market and depositors. Unlike 2008, when losses across the banking sector were related to risky loans, the losses in 2023 were largely attributable to investments in ultra-safe Treasury bonds. Beginning in 2022, interest rates rose significantly as the FED aggressively tried to stem the tide of high inflation by pushing interest rates higher. The aggressive rate increases led to significant losses in the bond investments that many banks held as investments. In the case of Silicon Valley Bank, the losses on their bond investments would not have been an issue if bank depositors had not rapidly demanded their money beginning on March 9th. If Silicon Valley had the time to allow their bond investments to stay invested to maturity, all of the losses would have been recouped.
Impact on Charles Schwab
In early March, regional bank stocks and the stock for Charles Schwab corporation plummeted. This type of isolated sector and stock activity would not usually be worrisome to more diversified portfolios, but Charles Schwab holds our personal accounts and your accounts.
Your money is safe at Schwab.
There are two companies that are separate and distinct that you interact with at Schwab. Charles Schwab & Co. is a securities firm that holds the investments that make up your account. Charles Schwab & Co. holds more than $7 trillion in client assets.
Second, is the Charles Schwab bank that performs normal banking functions. The only interaction your accounts have with the Charles Schwab Bank is the limited amount that is held in cash within your brokerage account. That balance is never exceedingly high and is well under the FDIC thresholds.
The two companies are separate, and the assets of the securities firm, Charles Schwab & Co., can in no way be comingled with Charles Schwab Bank.
Outlook & Positioning
During 2022 we made several incremental increases to stock allocations to take advantage of lower prices. We feel that these were executed successfully, and most accounts are in a more normalized target allocation. Prior to 2022, we had been purposefully under-allocating to stocks for fear of an overvalued stock market. As we previously detailed, the stock market has had a meaningful rally during the last 6 months, but there are still headwinds to the economy and markets. We plan to maintain current allocations for the foreseeable future but are leery about the stock market continuing to increase at the current pace. If the markets continued to tack on gains at the current rate, it would annualize to a return of more than 30%. That seems a bit too far too fast given the level of inflation in our economy, higher interest rates, and a more challenging earnings outlook.
As you can see in the chart below, we seem to be in a more fairly valued position than we've been in several years. The market doesn't appear to be significanly overvalued or undervalued at present.
