March 2023- Market Update

Data Dashboard

Stock Market

The S&P 500 finished March up 3.7%, bringing the YTD return to 7.48%. Returns were led by Technology (10.9%) and Communications Services (8.7%) which offset the negative return on Financials (-9.6%). Large-cap stocks benefited from their higher-quality, while small and mid-cap stocks lost value in the month.

On March 8th, Silicon Valley Bank plummeted after announcing a capital raise to increase the bank's liquidity position, which spooked depositors and started a run on the bank. Two days later, the bank collapsed. By Monday morning, the FDIC has guaranteed all deposits, effectively saving the Venture Capital and Startup industry from a disaster. Fear about a spread to the entire banking industry remained elevated for a few weeks, but seems to have subsided.

January Monthly Returns (by US Sector)

Bond Market

The bond market felt the effects of the SVB collapse more than stocks. The yields on US Treasuries fluctuated wildly from March 8th onward. The 2-year US Treasury Note (image below) dropped from 5.07% to 3.98% in 3 days, and continued to fluctuate up and down in a zig-zag pattern throughout the remainder of March. The 2-year is a good barometer for the expectations for the path of short-term interest rates, and the path was (and still is) very much in question.

The credit markets (outside of financials) weathered the storm well in March. The spreads on high-yield bonds widened, but mostly just offsetting the decline in treasuries and not exhibiting a massive increase in fear, as one might expect.

US Treasury Inflation Protected Securities (TIPS) show us the level of inflation priced into the treasury markets. Since the SVB collapse, the implied 2-yr inflation rate has declined from 3.4% per year to 2.7%. This is consistent with the expectations for fewer interest rate hikes given that markets expect the Fed to take their foot off of the gas.

Economics

At the risk of starting the parade too soon, the “soft landing” may actually be happening. The collapse of SVB looked at first to be the proverbial canary in the coal mine, but the US Government played savior once again and stepped in to backstop the banking industry. While we can all debate the long-term effects of the government's role as rescuer, financial markets and consumers see this action and breath a sigh of relief. Then, they return to spending.

The inflation measures are retreating, albeit slowly. Headline CPI for February was 6% yoy, and the March data is projected to come in at 5.2%. This path is encouraging. If this continues without a major reduction in economic activity and/or a large market disruption, the Fed will have completed the impossible. But it is still too soon to tell.

Despite high mortgage rates (6.75% Nationally), housing prices have remained at elevated levels. This may be a little misleading because the level of Pending Home Sales has declined since the beginning of the year, creating less supply. The supply constraint it likely to keep prices stable for some time, unless we see a severe economic recession.

Tactical Updates

The Global Tactical ETF portfolio shifted out of Asian stocks into developed international and Communications Services. In the Tactical Stock portfolio, we rotated further into tech, while taking advantage of some of the volatility in the Financials sector.

In the Low Volatility Tactical models we shifted some of the focus from short-term credit and Convertible Bonds to foreign sovereign debt and floating-rate treasuries. Our approach in the low-vol models is to shift between credit and duration without subjecting our clients to unnecessary drawdown risk.

General Client Considerations

IRS annual contribution limits for 401(k), 403(b), most 457 plans and Thrift Savings Plans (TSP) are increasing in 2023. Changing your elections at the start of the year can help you to spread out contributions evenly and ultimately maximize your tax advantaged retirement saving. In 2023, the contribution rate for these accounts is $22,500. This is an increase from the 2022 limit of $20,500.

Additionally, if you are 50 or older, the catchup contribution limit for 401(k), 403(b) and TSPs has increased from $6,500 to $7,500 in 2023. That means individuals who were born in 1973 or earlier can contribute up to $30,000 to these accounts. You do not have to wait until your 50th birthday to make catchup contributions - the contributions can start on January 1st of the year you turn 50.

With regard to IRAs and ROTH IRAs, the IRS changed the contribution limit from $6,000 to $6,500, and left the catch-up contribution at $1,000.

As we downshift from the holiday season, many of you likely have a list of To Do’s for 2023 including doctor’s appointments and organizational tasks. We suggest you add financial checkup to the list and encourage you to setup some time with us to review your financial plan. We look forward to hearing from you!

Thanks,

The Friedenthal Financial Team

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