Current market environment performance of dynamic, risk-managed investment solutions.
By Jason Teed
The first quarter of 2023 saw mixed performance across equities, bonds, and gold.
The S&P 500 increased by 7.5%, marking its best first-quarter performance since 2019 and the second best in the past decade. This robust growth came as a surprise considering the recent banking crisis, cryptocurrency meltdowns, and geopolitical uncertainty.
Strong corporate earnings, improving economic data, and investor optimism contributed to positive sector performance overall for the quarter. The Technology and Communications Services sectors led the way with 21.62% and 20.5% gains, respectively. However, the Energy, Financials, Health, and Utilities sectors experienced negative returns.
The Federal Reserve’s aggressive interest-rate hikes to combat inflation continued to play a significant role in bond performance. The 10-year Treasury yield fell to around 3.5% as investors—in light of the recent bank crisis and as-expected inflation readings—anticipated the end of tightening by the Fed.
Gold performed well in the first quarter of 2023. The price of spot gold increased by 8.5% to $1,977.96. The metal had faced significant headwinds in 2022 due to the rising rate environment; however, with the tightening cycle nearing its end, gold is experiencing new tailwinds. Additionally, as concerns of a recession grow, gold’s safe-haven status will likely push the metal higher.
We’ll probably see more market volatility going forward. First-quarter earnings are expected to be particularly painful, and we don’t know how the market will react to this new information. If the markets anticipate a short, shallow recession, then the worst of the equity bear market may be behind us. However, if numbers come in worse than expected for longer than expected, we could see further downside.
Another interesting phenomenon occurred in the first quarter: Bond and equity performance showed signs of uncoupling. In 2022, the two asset classes, which typically exhibit low correlation, began to move in similar directions due to the rising interest-rate environment. This means investors were not experiencing the diversification benefits they usually get from holding both asset classes within a portfolio. However, as stocks sold off in March 2023, long-term government bonds began to act as a safe haven and move upward in price. This uncoupling will likely continue, giving investors an additional tool to protect portfolio value.
Performance trends for the quarter
Despite ongoing whipsaw events in the markets, about 45% of our strategies at Strategic Solutions were profitable for the quarter. Top-performing strategies tended to be aggressive equity strategies, though multiple types of active management were successful for the quarter. Importantly, several strategies that tend to be vulnerable to whipsaw events navigated the markets well.
Our turnkey strategies struggled for the quarter. The algorithms that power those offerings have not yet responded to market and strategy movements in anticipation of further market volatility.
Among our strategies available in multiple risk profiles, there was almost no relationship between risk level and return. This often happens when markets are on the verge of changing character. The market was up for the quarter, but it also experienced significant volatility and turning points. It’s not surprising that a clear trend in performance hasn’t formed as it would in a consistently bullish or bearish market.