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A Solid First Quarter Thumbnail

A Solid First Quarter

Doug Johnson CFA, Senior Investment Strategist

An up and down 1st quarter 2023 ended on a positive note with the S&P 500 gaining 7.46%. This came after much of the progress made during the first 45 days was undone by the failure of Silicon Valley Bank (SVB) and the turbulence in the financial sector that followed. We have seen significant differences in asset class returns in 2022 and so far in 2023. One of the most prominent is the relative performance difference between Value and Growth stocks.

The chart shows the return of the Vanguard Value ETF(VTV) vs. the Vanguard Growth ETF(VUG). The line moved higher when Value stocks were outperforming in 2022 and fell as Growth has outperformed so far in early 2023. 

Why Do We Care?

Here is where things start to get complicated. The rally in stocks from the lows in mid-October to January 2023 were propelled by a broad rally. This type of technical support has historically accompanied strong and sustainable rallies.  However, the continuation of the rally into 2023 has seen a deterioration in breadth with only eight (of 500) stocks responsible for the bulk of the gains.  

Source: @biancoresearch

The chart above illustrates how narrow the market’s leadership has become, as 8 stocks currently represent over 80% of the return for S&P 500 year-to-date. The other 492 stocks are collectively underperforming T-Bills! So why have we seen such a big divergence?

The answer depends the economy’s ability to escape recession, which appears to be shrinking. 

Keeping a close eye on the labor market, particularly wages, the Fed remains committed to tightening policy in an effort to defeat inflation. In their most recent minutes, their assessment was that fallout from the US banking crisis was likely to tilt the economy into recession later this year. Many have expected the Fed’s inflation fighting efforts to result in recession, but the Fed’s agreement brings as many questions as it answers. These primarily involve severity and duration.

Through all of this, the market has remained quite resilient given the circumstances. While one can certainly make the argument that smaller participation in the rally is not a sign of a healthy market, it is hard to deny the trend remains positive and interest rate volatility has calmed considerably over the past month.  With the current environment providing such uncertainty, staying diversified remains important. HCM remains broadly allocated over several styles and sectors, both in stocks and bonds. Our slight overweight to high quality/Value sectors remain intact for now as we don’t believe macro headwinds have cleared sufficiently, but falling inflation and an eventual end to the Fed’s rate hike campaign could support stock prices absent a recession.

Weekly Focus – Think About It 

“The hardest thing to understand in the world is the income tax.”

 -Albert Einstein

Market Activity

Performance last week for the four major asset classes were:

  • U.S. Stocks – Russell 3000 (IWV) – Gain of 0.92%
  • Developed Foreign Markets (EFA) – Gain of 1.78%
  • Emerging Markets (EEM) – Gain of 0.84%
  • Fixed Income (AGG) – Loss of –1.04

 (Note: performance is based on the change in price plus dividends)

Last Week’s Headlines

  • March CPI revealed inflation remains on its downward path with headline inflation 5% in March, down from 9% on a year-over-year basis from last summer.   Core inflation rose by an unexpected 0.4% versus the prior month, putting the annual rate at 5.6%.
  • March retail sales spending fell 1% in March versus February, driven by declines in vehicle, building material and gas station sales.

Eye on the Week Ahead

  •  Busy week for economic data as Consumer Confidence, Durable Goods, PMI and PCE prices will all report.

If you have questions about the recent price volatility please contact a member of HCM’s Wealth Advisory Team:


 Any tax or other advice contained in this document, including any attachments, is not intended and cannot be used for the purpose of avoiding penalties under Internal Revenue Code. No action should be taken on any information contained in this message without first consulting with your tax/legal advisors regarding the tax/legal consequences for your particular circumstances.

 Additional Notes:

  • The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in genera
  • Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance
  • Past performance does not guarantee future results
  • You cannot invest directly in an index
  • Consult your financial professional before making any investment decisions

 • • •

Doug Johnson CFA, Senior Investment Strategist  Doug Johnson CFA
Doug is the Senior Investment Strategist in the Investment & Research Department.  He guides the Investment Committee in developing and implementing HCM’s investment strategies. Doug and his wife Cindy live in West Chester with their two sons. In his free time, Doug enjoys family time, golf, playing and watching hockey, and travel.
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