2023 First Quarter Letter

By David K. MacLeod, CFP®, CFA

Despite the recent demise of Silicon Valley Bank and increased volatility, we are pleased to report that both U.S. and international stocks performed well as the U.S. continued to experience economic growth. The S&P 500 had a strong quarter, returning 7.5%, with growth stocks leading the way. Additionally, small-cap stocks rose 2.6%. The 10-year U.S. Treasury bond yield declined to 3.5% due to signs of cooling inflation.

As we wrote in our March 13th update, the failure of Silicon Valley Bank caused concern in the markets about a possible larger banking crisis. We are glad to report the situation has stabilized after the Fed, Treasury, and FDIC announced a new program to support uninsured bank deposits and prevent further bank failures. While this may pose a moral hazard down the road, it is positive news in the short term. Deposit flows have stabilized, and small banks even experienced a small increase in deposits toward the end of March. It’s reassuring to know that banks are much better capitalized today than they were before the 2008 financial crisis.

Inflation remains the primary focus of global central banks. The Fed raised short-term interest rates by 0.25% in March. Month over month inflation data shows core services, including rent, are still experiencing high levels of inflation even as goods inflation is falling. However, according to real-time survey data, the hottest rental markets are beginning to cool and even decline in some cities. The markets expect overall inflation will cool over the next couple of years, which should allow the Fed to gradually cut short-term interest rates to a more normal level of 2.5 - 3.0%.

We’ve heard commentators raise concerns about the U.S. dollar and its status as the world’s reserve currency. India, for example, has offered to settle trade with other countries in Indian rupee instead of dollars. It remains to be seen how many countries will take them up on that offer. Even if there is less demand for the U.S. dollar in the future, it may not be a bad trend. The strength of the dollar has contributed to America’s large trade deficit, which hurts U.S. exporters. This year, U.S. agriculture is expected to run a trade deficit, with agricultural imports exceeding exports by $3.5 billion. Additionally, international and U.S.-based multinational companies can do well when the dollar weakens because currency translations contribute to profits. We don’t think U.S. investors should fear a weakening dollar.

Please provide us with a copy of your 2022 tax returns after you file them. We are actively reviewing returns as they come in. Feel free to send a digital copy or drop off a hard copy to our office.

We are holding our annual Shred Day on Wednesday, May 10th at a parking lot adjacent to our office on Brea Blvd. Keep an eye out for more information as the date approaches.