Stocks, as measured by the S&P 500 Index, spent the entire first quarter of this year within a narrow range of 3850 to 4150. It is interesting to note that on March 31, this index was at the same level it was on March 31, 2021. All the gains from 2021 were erased in the bear market of 2022 so that there have been essentially no gains from the stock market over the past two years.
Given that stocks in 2022 had suffered their worst decline since 2008, many observers assumed we would see a nice recovery in 2023 in both stocks and bonds. As the first quarter has come to a close, it’s fair to say the markets have been attempting a recovery. From the table below, you can see that most areas of the market are indeed positive, but it is certainly not an emphatic bounce into the new year. While the S&P 500 Index of large U.S. companies returned almost 8% for the quarter, stocks popped over 3% in those last three days. Otherwise, it would have been a rather ho-hum start to the year. The Dow Jones Industrial Average of 30 of the largest U.S. stocks was actually in negative territory until the closing days of the quarter.
The back-and-forth action in the stock market (seesaw pattern of rallies and sell-offs) that we discussed several times last year continued to play out in the first quarter. Stocks rallied 9% to start the year and fell 8% into mid-March, wiping out nearly all the gains, and then finished the quarter with a rise of nearly 7% (for a gain of 7.5% for the full quarter). Bonds experienced their own muted version of this volatility, rising 4% to start the year and falling 4% through February, before rallying back 3% to end the quarter.
Coming into this year, FSA accounts were invested roughly 50% in stock and bond funds and 50% in money market funds. The most significant change during the quarter was gradually adding growth-oriented funds (those that tend to overweight technology stocks) to the portfolios after spending most of last year leaning toward value-oriented funds (funds that tend to overweight financials and energy).
Besides the tilt towards growth stocks, Tactical Growth and Core Equity strategies now also hold foreign funds for the first time in a year. We may add foreign funds to Conservative Growth and Income & Growth portfolios in the quarter if markets continue to behave.
For bond investors, this has been a rollercoaster year so far. Several of the funds we added late year tripped the FSA Safety Nets® in February as the bond market dropped, giving up all the gains from January. In March, however, bonds rebounded, and we may look to increase our bonds holdings if they can break above their previous highs.
What May Lie Ahead
Stock and bond markets remain in a tug of war over opposing projections of what lies ahead.
Some investors believe the U.S. is headed for a recession, based on signs that include:
- An inverted yield curve (short-term bond yields above longer-term bond yields)
- Recent strength in defensive areas of the market (utilities, staples, health care)
- Early signs of economic softening
Others believe the U.S. can skirt recession and make a soft landing, as indicated by:
- Ongoing strength in economic growth
- Encouraging stock market performance
- A resilient labor market
This has created a seesaw between growth and value stocks, small-cap and large-cap stocks, high yield bonds and high quality bonds. As long as we remain in this trading range, we will keep the portfolios in the middle lane, trying not to shift too much to either side. Once the market finally breaks out, moving either up or down, we can respond accordingly. We will also maintain elevated money market levels, especially since we can earn a decent yield on our money market funds today.
Portfolio Update
Keep in mind that because we manage clients’ portfolios individually, the holdings in your specific accounts may differ somewhat from the averages.
Strategies That Employ the FSA Safety Net®
Income (Strategy 1)
As bonds bounced in the first quarter, we moved the Income strategy from a 70% money market allocation at the end of the year to 30% in money markets. We added two multi-sector bond funds (portfolios hold both high quality and high yield bonds) in January and another two funds in March.
Income & Growth (Strategy 2)
This strategy finished the quarter with modest gains, which were quite acceptable given the choppiness in the stock and bond markets. During the quarter, we added an equity income fund to the portfolio, as well as a multi-sector bond fund. As of April 3, these portfolios held 30% in equity funds, 30% in bond funds, and 40% in money markets funds.
Conservative Growth (Strategy 3)
Trading was relatively light in this strategy for the quarter. We added a large-cap equity fund and sold a high yield bond fund as that asset class sold off in February. Currently, these portfolios hold 35% in equities, and 65% in money markets.
Core Equity (Strategy 4)
Core Equity accounts began the year with a tilt toward value stocks, but we reduced that allocation as growth stocks regained momentum. We added a technology sector fund, as well as a fund that buys leisure stocks (such as Comcast, Disney, and Airbnb). As of April 3, the Core Equity portfolios held 70% equities and 30% in money markets.
Tactical Growth (Strategy 5)
Trading was fairly active in this strategy as market leadership ebbed and flowed through the quarter. We sold a small-cap value fund, as well as funds that invest in energy stocks, biotechnology stocks, and Chinese stocks. On the other side, we bought technology funds, as well as a large-cap equity fund. Currently, these portfolios hold 50-65% in U.S. equities, 10% in foreign stocks, and 25-30% in money markets.
Strategies WITHOUT the FSA Safety Net®
Sector Rotation
The Sector Rotation strategy has attempted to stay in sync with the prevailing leadership, which has been a challenge given the volatility in the first quarter. The holdings had a value tilt early in the quarter, while it has a decidedly growth tilt today. As of the April rotation, the portfolio holds the following funds: three technology funds as well as others in leisure, telecommunications, and transportation.
Global Rotation
These portfolios have managed okay through the choppiness of the market in the first quarter. During the quarter, we added a second international fund and a second NASDAQ fund, while selling the large-cap value fund. Currently, these portfolios hold 80% in stock funds and 20% in money markets.
Strategies That Remain Fully Invested Through ALL Market Cycles
Global Moderate
An allocation to foreign stocks and gold helped this balanced and passive strategy for the quarter, though small-cap stocks and real estate hampered returns.
Global Growth
Similar to Global Moderate, this aggressive strategy was helped by its allocation to foreign stocks and gold, but small-cap stocks and real estate tempered returns for the quarter.
Please remember to inform your advisor of any changes in your life that might affect your investment objectives and how we manage your money.
Ronald Rough, CFA
Chief Investment Officer
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