Numbers do not lie. Currently, many people are reluctant to invest because they perceive the economic environment as treacherous. Countless are unduly influenced by the negative themes appearing in print, online, and on television. These themes include a potential recession, elevated inflation rates, bank system instability, and the increased financing costs for auto loans, home mortgages, and credit card balances. However, the stock market returns in truth tell a more constructive story. For the second quarter in a row, financial markets generated positive returns overall, countering the fearful headlines.
Looking at the numbers, at the end of Q1 2023, Large Cap technology companies lead all major sectors as the NASDAQ continued to claw-back from 2022’s route with an impressive 17.05% return. International stocks gained with an 8.65% return, the S&P 500 ended the quarter positive with a 7.48% return, and the Dow Jones Industrial Average concluded with a .93% return.
Even more illuminating are the most recent six-month returns (9/30/22 – 3/31/23) found in the table below, which indicate a full-blown recovery is in progress:
It appears that stock markets bottomed out at the end of the third quarter in 2022. Because of this, investors are now faced with the decision of waiting for all the fear mongering to end (it won’t) before investing and getting involved in the rally. As discussed in previous D’Arcy Capital Economic Perspectives, the best periods for the stock market are frequently not the best times for the economy. For example, the markets declined in the first nine months of 2022 (S&P 500 -23.87% and NASDAQ – 31.99%) anticipating weak economic conditions such as high inflation, increasing interest rates, and elevated mortgage rates that are just now materializing. The rally of the previous six months is awaiting a resolution of the previous economic difficulties in late 2023 and early 2024.
In other financial markets, interest rates dipped, oil leaked, and gold moved preciously higher. The 10-year U.S. Treasury yield declined from 3.87% to 3.47% during the quarter. Oil lost $4.59 per barrel during the same period to end at $75.67, and gold was the winner with a positive three-month return of 7.95%. A troy ounce of gold ended the quarter at $1,969.
The most significant development during the quarter was the collapse of Silicon Valley Bank (SVB) on March 10th. The bank’s demise left shareholders with a complete loss while depositors were left unscathed. This briefly terrified investors as a classic run-on-the-bank was unfolding. In short, the cause of the SVB failure was the result of poor management coupled with non-loyal, high dollar depositors with online access to move money. The bank was not able to liquidate its investments to satisfy the massive, fast-moving surge in withdrawal requests. This caused a ripple effect throughout the entire financial sector as depositors and investors worked to sort it all out. By the end of the quarter, the failure of SVB had become defined as a “one off” event.
As described above, it is easy to have a negative outlook for investing. However, with a little research and understanding, the future appears very promising. Investors are faced with a wide spectrum of reassuring investing options, which did not exist as recently as two years ago. At that time, investors had few reasonable opportunities to generate investment returns. The only option was to invest in large growth technology companies, or those indices that were loaded with large growth technology companies. This was exceptionally risky as large technology companies were expensive and overvalued. Today, investors can generate returns with money markets, bills, bonds, and stocks from multiple asset classes. Investors can employ far less risk for decent returns as diversification has firmly resurfaced. In particular, the normalization of interest rates, such as the Fed Funds rates going from 0% to 4.75% in fourteen months, has produced a healthier capital allocation opportunity set. Conservative investors now have CDs, Money Markets, and T-Bills as options to grow their savings. More aggressive investors can exist in higher potential asset classes like emerging markets and small cap stocks.
D’Arcy Capital continues to believe that extra value exists within international, emerging markets, and small company stocks. In fixed income U.S. Government T-Bills and double tax-free municipal bonds are appearing very favorable as well. Crypto currencies such as Bitcoin, Ethereum, and Tether continue to present extreme levels of risk and are unsuitable for most investors.