After the losses at Silicon Valley Bank and several other regional banks during this first quarter of 2023, the federal government quickly reinforced public confidence. Giving account holders access to all their money, even on accounts exceeding the Federal Deposit Insurance Corporation (FDIC) limit of $250,000. Despite the government’s quick action, questions around the U.S. banking system have caused anxiety across the county. While we understand the concern, we are not overly concerned since, overall, the banks are well-capitalized (especially compared to the Global Financial Crisis). Besides, the Fed is determined not to let banks default on their obligations.
However, we are concerned that the banks have been tightening their lending conditions, and we expect that to continue. This tightening means less lending to businesses creating a drag on economic growth.
When we look at the various components of economic growth, the labor market continues to look good, housing, while under mortgage pressure, remains viable due to high demand, and the consumer, while not saving at historical rates, continues to be holding up.
Unfortunately, business earnings have deteriorated due to rising costs, and inflation is still high, although it is coming down. The real pressure on inflation seems to be subsiding, and many believe the Fed will begin cutting interest rates in the second half of the year.
What does this mean to how we are investing your portfolio?
Firstly, while the first quarter of 2023 did not see a recession, we believe there is a real risk of a recession. Many of you might recall that we did a presentation where we demonstrated that recessions don’t always mean a downward market in stocks, so we are not suggesting you stop investing.
However, as always, we urge you to discuss your cash obligations and needs with us so we can plan ahead of time should we experience more volatility in the coming months.
Our top holdings this first quarter is in the developed international market space. Large-cap International delivered x% in just three months. The outperformance of overseas investments does not surprise us since we expect strong growth from this asset class. In one of our last videos, we discussed this asset class which makes up 30% of the world’s capitalization and is trading at a low price relative to its value.
Reinsurance bonds are another asset class experiencing strength this first quarter, up 5.18%. The strong results are partly related to a repricing of reinsurance bonds after Hurricane Ian. The yield on these bonds has increased dramatically.
Last year’s top-performing asset class natural resources have not had a good quarter, down 5.08%. However, with the cutbacks announced by Opec, China’s reopening, which should drive demand for raw materials, and the continued need for Agricultural products, we have not given up on this asset class. It is also important to remember that regardless of month-to-month performance, its low correlation to U.S. equity validates its role within our portfolios. So far, so good for 2023. What will happen in the upcoming months is anyone’s guess. Still, we continue our value tilt, hyper-diversification, and focus on your cash obligations to prepare us for anything.
The video that accompanies this blog is here:
