Most asset prices rose moderately over the course of Q1 2023 despite persistent headwinds across the global economy. It goes without saying inflation remains historically high albeit meaningfully lower than its peak reading in June of last year. Banking crises in both the U.S. and abroad added a component of uncertainty. No one has yet to declare the domestic economy is in a recession which seems all but inevitable in the coming quarters.
Why then was there a shift back towards a risk-on approach? An inflation reading of almost half of the June 2022 peak coupled with forward thinking sentiment the Federal Reserve will begin its move away from ongoing aggressive (hawkish) monetary policy is a start. The current inflationary environment coupled with falling bond yields helped to stimulate fixed-income markets following the first bear market cycle in that asset class since the early 1980s. From a macroeconomic perspective the end of restrictive COVID policy and the ‘reopening’ of the Chinese economy added fuel as well.
Progress in these areas drove both equity and fixed-income markets higher over the course of Q1 but also present persistent, measurable challenges looking ahead. An uncertain path forward from a monetary policy perspective, cost of capital to both the consumer and corporations due to higher interest rates and potential continued fallout in the banking sector equate to variables and present a case for a cautious approach. We feel volatility will persist in the most likely scenario for the remainder of the year.
And that is how we approached Q1 within both the Tactical Allocation Portfolio (TAP) and the Sector Equities (SEC EQ) models to start the year. Cautious. Lagging equity markets for the first time in over 3 years to start 2023 was the result. Equity models maintained above average allocations to cash and cash equivalents and remained true to a conservative approach in fixed-income markets. Unwavering commitment to model construction seized opportunities as they presented themselves but fell short of the S&P 500 index. All while maintaining risk-management measures to limit downside exposure. All of this led to a trade heavy environment which carried over from last year.
The good news is there is a lot of year ahead and we continue to screen equity markets daily in an effort to add risk. If indeed recession presents itself, in all likelihood, equity markets will move back to a risk-off approach. Giving TAP and SEC EQ the chance to gain ground and end the year on a positive note.
For a broader based take on macroeconomic conditions from our friends at Charles Schwab & Co. please click below.
As a firm we welcomed a new addition to our team at the beginning of the year opening an office in Telluride, CO. And have some exciting things to share with you on the horizon. Stay tuned to our Weekly Market updates for announcements and please do not hesitate to reach out to any one of us if we can help you to digest what we have outlined above. Long term we remain in great shape based the last several years and look forward to what lies ahead.