Despite market volatility in February and much of March, all major indices were positive in the first quarter, continuing the rally that began in the fourth quarter of last year.
The concerns of 2022 are still present but seem to be trending in the right direction for the most part. Inflation continues to fall, with consumer prices rising 6.0% year-over-year in February, well ahead of the Fed’s target but below the peak seen in the summer of last year. The yield on the 10-year Treasury had its biggest annual increase on record last year, which hurt bond returns in 2022 but paved the way for better future returns in 2023. Unemployment remains near historic lows at 3.6%.[1] Even the bank failures, with Silicon Valley Bank being the second-largest bank to fail in US history, ultimately did not derail markets, although they added their fair share of volatility.[2] Work to tame inflation across the globe remains, and the ultimate impact of central bank actions to combat it is still unknown. However, markets seem to be looking past that for the time being, and both stocks and bonds enjoyed strong returns in the first quarter.
Not all trends have continued from the previous year – after value stocks dominated in 2022, growth stocks, namely the big tech stocks, led in the first quarter, helped by falling bond yields and expectations that the Fed might need to pause their rate hikes. In fact, during the banking-related market volatility, Microsoft and Apple alone in the S&P 500 outweighed the losses in the financial sector.[3] As a reminder, bank stocks tend to fall in the “value” bucket while tech stocks tend to fall under “growth.” While growth stocks also outperformed overseas, the difference was more pronounced in the US.[4]
Developed international markets outperformed US stocks for the second quarter in a row after US stocks dominated for quite some time. The outperformance has been so pronounced that developed international stocks are down only 1.4% while US stocks are down 8.6% over the past 12 months,[5] despite a strengthening dollar being a headwind for US investors in international markets. These trends move in cycles, and so we continue to stay exposed to it all, both US and international, as well as growth and value, so that we do not miss out when a new trend presents itself.
Bonds also did well in the first quarter, with emerging market bonds leading the way. Recent volatility in stock markets has contributed to falling yields as some investors flock to the safety of Treasurys. Yields are still higher than we’ve seen for quite some time, but they have come down from the highs of 2022, helping bond returns. With yields elevated but not expected to rise substantially more, bondholders have more reasons for optimism than they have had for quite some time.
Markets are grappling with several uncertainties, but, with the exception of the recent bank crisis, these uncertainties are not new. While things could change quickly, markets seem to be looking past these uncertainties and seeing some light at the end of the tunnel. We may continue to see volatility, as we have in the first few days of April, and there is still work to be done for markets to reach their highs of early 2022. But investors who stayed the course participated in the recent rally and benefited from their discipline.
[1] Matt Grossman, “Bond Market Rally at Risk As Bank Stress Diminishes”, Wall Street Journal print edition on 4/1/2023, page B11.
[2] Flitter, Emily. “Silicon Valley Bank Fails After Run on Deposits.” The New York Times, 14 Mar. 2023, www.nytimes.com/2023/03/10/business/silicon-valley-bank-stock.html. Accessed 7 Apr. 2023.
[3] Singh, Hardika. “S&P 500’s Resilience in the Banking Crisis Is Largely Thanks to Tech.” WSJ, 3 Apr. 2023, www.wsj.com/articles/s-p-500s-resilience-in-the-banking-crisis-is-largely-thanks-to-tech-654cc621. Accessed 7 Apr. 2023.
[4] Source: Morningstar Direct. As of 3/31/23.
[5] Source: Morningstar Direct. As of 3/31/23.
Important Disclosures
Team Hewins, LLC (“Team Hewins”) is an SEC registered investment adviser; however, such registration does not imply a certain level of skill or training, and no inference to the contrary should be made. We provide this information with the understanding that we are not engaged in rendering legal, accounting, or tax services. We recommend that all investors seek out the services of competent professionals in any of the aforementioned areas.
The volatilities of any comparative indices included in this presentation may be materially different from the individual performance attained by a specific client in a Team Hewins strategy. In addition, client holdings may differ significantly from the securities that comprise the indices. The indices have not been selected to represent an appropriate benchmark to compare an investor’s performance, but rather are disclosed to allow for comparison to the performances of certain well-known and widely recognized indices. The indices are unmanaged, include reinvestment of dividends, capital gain distributions or other earnings and do not reflect any fees or expenses. Indices cannot be invested in directly. Set forth below are descriptions of the indices included in the presentation.
Past performance is not an indication of future returns. Comments provided herein reflects Team Hewins’ views as of the date of this write up and are provided for informational purposes only. Such views are subject to change at any point without notice. Some of the information was obtained from third party sources believed to be reliable but the information is not guaranteed. Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. Due to various risks and uncertainties no reliance should be placed on any such statements or forecasts when making any investment decision. Nothing presented herein is or intended to be investment advice or a recommendation to buy or sell any securities and no investment decision should be made based solely on the information provided. Team Hewins is not responsible for the consequences of any decisions or actions taken as a result of information provided in this writeup and does not warrant or guarantee the accuracy or completeness of the information. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Asset allocation and portfolio diversification cannot assure or guarantee better performance and cannot eliminate the risk of investment losses.
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Index Descriptions
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S&P 500 Index (Large Cap U.S. Stocks): measures the performance of large capitalization U.S. Stocks. It is a market-value-weighted index of 500 stocks that are traded on the NYSE, NYSE MKT, and NASDAQ. The weightings make each company’s influence on the Index performance directly proportional to that company’s market value.
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Russell 1000 Growth Index (Large Cap U.S. Growth Stocks): measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values.
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Russell 1000 Value Index (Large Cap U.S. Value Stocks): measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
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Russell 2000 Index (Small Cap U.S. Stocks): An unmanaged index that measures the performance of the small-cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index, representing approximately 10% of the total market capitalization of that index and includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. Russell Investment Group owns the Russell Index data, including all applicable trademarks and copyrights.
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Russell 2000 Value Index (Small Cap U.S. Value Stocks): measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values.
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Russell 2000 Growth Index (Small Cap U.S. Growth Stocks): measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values.
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MSCI EAFE Index (International Developed Stocks): The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization-weighted index that is designed to measure the equity market performance of developed markets, excluding the U.S. & Canada. The MSCI EAFE Index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
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MSCI EAFE Value Index (International Developed Value Stocks): The MSCI EAFE Value Index captures large and mid-cap securities exhibiting overall value style characteristics across Developed Markets countries around the world, excluding the US and Canada. The MSCI EAFE Index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
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MSCI EAFE Growth Index (International Developed Growth Stocks): The MSCI EAFE Growth Index captures large and mid-cap securities exhibiting overall growth style characteristics across Developed Markets countries* around the world, excluding the US and Canada. The MSCI EAFE Index consists of the following 22 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.
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MSCI Emerging Markets Index (Emerging Markets Stocks): is a Morgan Stanley Capital International Index that is designed to measure the performance of equity markets in 25 emerging countries around the world.
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MSCI Emerging Markets Value Index (Emerging Markets Value Stocks): The MSCI Emerging Markets Value Index captures large and mid-cap securities exhibiting overall value style characteristics across 25 Emerging Markets (EM) countries.
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MSCI Emerging Markets Growth Index (Emerging Markets Growth Stocks): The MSCI Emerging Markets Growth Index captures large and mid-cap securities exhibiting overall growth style characteristics across 25 Emerging Markets (EM) countries.
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Bloomberg Barclays US Aggregate Bond Index (Investment Grade U.S. Bonds): includes U.S. government, corporate, and mortgage-backed securities with maturities of at least one year.
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Bloomberg Barclays Muni Bond Index 1-10 Yr Blend (1-12) (Int-Term Municipal Bonds): A market value-weighted index which covers the short and intermediate components of the Barclays Capital Municipal Bond Index. The 1-10 Year Municipal Blend index tracks tax-exempt municipal General Obligation, Revenue, Insured, and Prerefunded bonds with a minimum $5 million par amount outstanding, issued as part of a transaction of at least $50 million, and with a remaining maturity from 1 up to (but not including) 12 years.
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ICE BofA Merrill Lynch U.S. High Yield, BB-B Rated, Constrained Index (High Yield U.S. Bonds): Tracks the performance of US dollar-denominated below-investment-grade (BBB rated) corporate debt publicly issued in the US domestic market. Qualifying bonds are capitalization-weighted provided the total allocation to an individual issuer does not exceed 2%. Issuers that exceed the limit are reduced to 2% and the face value of each of their bonds is adjusted on a pro-rata basis.
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JPM GBI EM GD USD Unhedged Index (Emerging Markets Bonds): The JP Morgan EMBI Global Diversified is a uniquely weighted index that tracks total returns for U.S. dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities. The index limits the weights of countries with larger debt stocks by only including a specified portion of these countries’ eligible current face amounts of debt outstanding.