3 min read

First Quarter of 2023

First Quarter of 2023

The first quarter of 2023 was looking like a small reprieve from 2022. Silicon Valley Bank then had a 1930’sstyle bank run and failed to issue equity to save itself. With around $200 billion in assets, its demise is one of the largest bank failures since 2008. While that sounds dramatic, its failure was a result of poor management, and a customer base of tech companies and venture capitalists who all talked to each other and essentially coordinated a run on the bank. Unlike most banks, an extraordinary number of accounts, 88%, were above the FDIC limit. Subsequently, the bank has been sold off to a competitor with the government facilitating the transaction, and all depositors will be made whole. Silvergate Bank and Signature Bank of New York also failed, and Credit Suisse was forced to sell itself to UBS.

The pressures on banks today are very different from 2008. When most of us consider a financial crisis, we think of poorly written loans defaulting as they did in 2008. The recent bank failures were a function of the cost of deposits increasing rapidly relative to the yield on banks’ investment portfolios. Policymakers and regulators guaranteed the system had plenty of capital to absorb large losses or shocks. In retrospect, it was this, along with aggressive monetary policy, that laid down roots for the current banking turmoil.

In recent weeks, the banking sector has shown some resilience and customer deposit flight to higher yielding cash-equivalent instruments has not been overwhelming for the system. However, banks are still challenged as they must pay more to depositors while lending at low rates. We expect this will result in a slowdown in lending to consumers and small businesses.

The larger implication from the banking crisis is that after over a year of rapid interest rate increases, the Fed has finally broken something and will be limited in raising interest rates from here for the time being. In fact, the market expects the Fed to cut rates before year end.

Updated Outlook

The macro environment today is incredibly confusing. The Fed raised rates in March and Powell said they don’t plan on cutting rates this year, yet the market expects the Fed will cut rates multiple times from here by year end. The yield curve is deeply inverted, which is a signal that a recession is coming. There are market strategists that claim we are in a new Bull market, while many others believe that the Bear market is not over and we will hit new lows. The market has been resilient and has overcome several obstacles since the end of 2021 including:

  • Interest rates rising at their fastest pace in the last 40 years
  • Collapse of massive crypto exchange, FTX
  • Russia/ Ukraine War
  • Increased Tensions with China
  • SPAC evaporation
  • Historic decline in bonds and stocks
  • Banking crisis with the 2nd & 3rd largest bank collapses in U.S. history
  • Largest Fed balance sheet on record

If we spent 90% of our time trying to determine the direction of the economy or market, we would be unsuccessful. We instead spend 90% of our time following the companies we own and searching for new ones to purchase. We expect to remain in a volatile environment and believe that there are many obstacles in front of the markets. We are operating with an increased sense of caution. We have adjusted the holdings in the portfolios to make them more defensive. We also continue to hold an above average percentage of accounts in Short Term Treasury Bill ETFs that yield upwards of 4%. We don’t know how the market will perform in this year or in any given year, but we are confident that over the long term being invested in a portfolio of unique companies, with first class management teams that are recession resistant, and have long term tailwinds will lead to superior returns.

For the first quarter the S&P 500 was up 7.5% and the Dow Jones Industrial Average was up 0.9%. Dividend and value stocks struggled in the quarter while, growth names did well and bounced back nicely from 2022. Our private account strategies’ estimated performance in the first quarter is as follows:

  • Friedberg Focused Equity: +8.3%
  • Brasada Preferred Income: +6.9%
  • Friedberg Dividend Growth: +1.4%
  • Brasada US Equity: +0.3%
  • Friedberg Equity Income: -1.9%

As you know, the portfolios we build for you are customized, so your experience will typically be different than the composite averages. As a reminder we are invested alongside the client in the same strategies. Unlike many Financial Advisors we believe it’s critical that we invest our money the same way we invest your money. We appreciate the confidence you have placed in us and wish you the best.

Sincerely,

Jonathan Reichek, CFA

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