Markets continued to be surprisingly resilient in the first quarter of 2023 despite continued tight monetary policy and the highest interest rate level in decades. Even with the Fed signaling that their monetary tightening may be approaching an end, rising twice in Q1 and from 0% in March 2022 to 5% ending Q1 2023, stocks surged in January before giving back half of those gains in February and March. It was the 8th consecutive raise attempting to tame inflation. In addition, an unexpected regional banking crisis arose, where bond assets on the balance sheets of several banks dropped so far and fast, the banks themselves did not have a high enough regulatory asset level to remain viable and were forced to close their doors. This event has shown us that even some of the smartest financial businessmen and women did not anticipate the level of duration risk (interest-rate risk) in holding longer maturity bond assets in a rising rate environment. Adding to already uncertain economic conditions was the one-year anniversary of Russia’s unprovoked invasion of Ukraine, as well as the prospect of a Chinese invasion of Taiwan. We feel we’re easily in the highest geopolitical tension in recent memory, which adds to overall investor uncertainty. In spite of these impediments, recent corporate earnings results have fared better than investors feared, leading to strong quarter-end results for the equity markets.

The major stock indices posted gains of 7.5% and 0.9% for the S&P 500 and the DJ Industrial Average in Q1, while the NASDAQ Composite Index rose an impressive 20.8% in Q1. Internationally, the EAFE gained 8.6% for the quarter. The bond markets also fared well, as the Bloomberg U.S Aggregate Bond index gained 3.0%. Additionally, with market uncertainty present, gold continued to creep up in value, seeing inflows in Q1 leading to an 8.2% increase on the back of market and geopolitical uncertainty. The average stock in Morningstar’s coverage universe remained undervalued by 8%. Communication Services continued to be the biggest bargain, now trading 29% below fair value. Real Estate and Basic Materials at 16% and 13% represented the next largest sector percentages under fair market value. Consumer Defensive was the only overvalued sector, ending the quarter 1% over fair value1. Crude oil ended the quarter down 6%, while being flat from Q1 ended 2022. Giving us the most pause is the S&P 500 valuation, ending the quarter a staggering 49.1% overvalued from a Price/Earnings (P/E) basis. From our conservative management perspective, this fact alone has given rise to our unwillingness to get too aggressive with allocation of new money. We’re opting to take larger positions for client portfolios in money market funds. While their safety is the primary driver, their interest has now gotten close to 5% annually. We feel this is a nice hedge for a portion of client portfolios, while we wait for a lower broad market valuation to enter equities. We look forward to continually earning your business, your trust and your referrals, and are honored to help all our clients understand these challenging economic times.

Jack A. Kennedy

Chief Investment Officer