2023 Q2 Market Commentary…
Approximately 50% of the NASDAQ 100 Index is concentrated in just seven stocks – Meta, Apple, Google, Microsoft, Amazon, NVidia, and Tesla. These seven stocks had a solid quarter in performance terms, yet only Apple stock is trading anywhere near all-time highs set back in the fall of 2021. Perhaps, these seven stocks were viewed by investors as a “safe haven” amidst a broader stock market that does not look much healthier than it did in all of 2022.
Tens of thousands of employees were let go by these seven companies and others in the first quarter of 2023. Job cuts can provide a boost to the company stock price, but it’s a strategy that only helps the bottom line, not the top line. It’s the top line (gross sales and revenue) that matters most, and the next wave of quarterly earnings this spring could paint a dismal picture across many companies and sectors. Nevertheless, for at least the first quarter, tech stocks gave the market some relief. (See Q1 2023 performance chart below)
This is still a recessionary environment, and this market is fragile. The regional bank liquidity crisis in March was not likely an isolated event. The interest rate yield curve is steeply inverted, meaning short-term interest rates are currently higher than long-term interest rates. Short-term bank deposit account rates are not keeping pace with short-term treasury rates, and that is one cause of the recent bank liquidity crisis.
In 2020 – 2021, because of fiscal response to COVID, banks were so flush with consumer monetary stimulus deposits, and it dwarfed the demand for consumer and business loans. Many of the banks used that excess liquidity to purchase low-yield U.S. treasury bonds under the assumption that inflation was transitory. As the economy reopened for business later in 2021, government spending didn’t slow down. Instead, the spending accelerated while the Fed heads, congresspeople, and U.S. Treasury officials continued to call inflation “transitory”. It took until 2022 for them to admit they were wrong about inflation, and we are now feeling the effects of their grave miscalculation. Now, short-term interest rates have aggressively spiked, and banks are seeing a greater demand for withdrawals, as money is moving from banks into treasuries and other inflation-fighting assets. In some cases, banks are being forced to sell low-yield treasuries at a loss to meet the deposit redemption volume. As long as the yield curve remains inverted, we expect banks will continue to lose deposits to alternative fixed rate investment options. We are proof of that trend at Future Bright. Our treasury bond positions have increased five-fold since mid-2022. We’ve also seen an increased interest in rate-lock annuities.
In the words of Mark Twain, “Risk happens slowly, then all at once.” After clawing back some decent returns on equities this quarter, we will be doing some portfolio repositioning in Q2 to prepare for a more challenging corporate profit outlook ahead. We also feel that an adverse credit event may be brewing, and it warrants a cautious approach to equities in the months ahead.