2023 First Quarter Investment Report

Were last year’s market losses an illusion? We’ve now experienced two consecutive quarters of healthy market gains, the long-predicted recession hasn’t materialized despite rising interest rates and the Fed reducing its balance sheet—and oil prices have stabilized. So why are investors still so worried?

The market gains in the first three months of the year were spread fairly evenly across all sectors. The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—gained 7.26% in the first quarter. The comparable Russell 3000 index is up 7.18% so far this year.

Looking at large cap stocks, the Wilshire U.S. Large Cap index is up 7.40% in the first quarter. The Russell 1000 large-cap index has gained 7.46% so far this year, while the widely-quoted S&P 500 index of large company stocks gained 7.03% during the year’s first quarter.

Meanwhile, the Russell Midcap Index is up 4.06% in the first quarter.

As measured by the Wilshire U.S. Small-Cap index, investors in smaller companies received a 4.02% gain for the most recent quarter. The comparable Russell 2000 Small-Cap Index posted a 2.74% gain over the past three months. The technology-heavy Nasdaq Composite Index, the biggest loser in 2022, came roaring back in the first quarter, posting a 16.77% return.

Foreign markets moved in lock-step with the U.S. The broad-based EAFE index of companies in developed foreign economies gained 7.65% in the first quarter of 2023. In aggregate, European stocks were up 7.95% in the past three months, while EAFE’s Far East Index delivered a positive 7.08% performance. Emerging market stocks of less developed countries, as represented by the EAFE EM index, gained 3.54% in dollar terms in the first quarter.

Despite the rise in interest rates (and higher loan costs), real estate securities produced decent returns. The Wilshire U.S. REIT index posted a 3.25% gain in the first quarter of 2023. However, other alternative parts of a diversified portfolio were not so fortunate. The S&P GSCI index, which measures commodities returns, lost 5.91% of its value in the most recent three months. Utility stocks posted a 4.94% loss in the first quarter.

Bond rates rose dramatically last year, but that trend seems to have moderated. 30-year U.S. government bond yields are down slightly, from 3.96% at the end of last year to 3.65% currently. 10-year bonds are yielding 3.47% while, interestingly, 5-year government securities are yielding a higher 3.57%, 2-year Treasuries are yielding 4.03%, one-year government bonds are yielding 4.59% and 6-month securities are now yielding 4.86%. Whenever shorter-term bonds are paying bond investors more than their longer-term counterparts, it is called a yield curve inversion. Rarely will you see one as dramatic as this.

Municipal bonds are a bit less chaotic at the moment but there is still inversion going on; 30-year munis, on average, are yielding 3.38%, but the inversion can be seen in 10-year (2.28%), 5-year (2.23%), 2-year (2.41%) and 1-year (2.47%).

So… What about that recession that everybody keeps predicting? Are banks safe anymore? Will the war in Ukraine jump the borders and lead to something more dangerous? When will inflation finally moderate? Behind the nice returns, it’s possible to find a world of uncertainty, and the narrative threads are undeniably complicated.