Q1 2023 Performance Blog

Key Takeaways 

• While the banking crisis was severe, it has directly slowed down the economy, with the impact of tightening credit conditions being equivalent to rate hikes. 
• Despite the heightened volatility and reversals during the quarter, markets managed the crisis well, with long-duration bonds, large-cap growth stocks and gold leading the markets.
• All New Frontier ETF portfolios delivered positive returns in Q1, in line with broad markets. As stocks and bonds were both doing their jobs, 60/40 portfolios rebounded strongly from their worst-ever year in 2022. Diversification is and will be beneficial to investors. 

Market Performance  

The first quarter was characterized by volatility and reversals in the financial markets, with the banking crisis raising a lot of uncertainty regarding the economic outlook and the future path for the Federal Reserve rate hikes. As shown below, market expectations for what the Fed is going to do at its upcoming May meeting fluctuated throughout the quarter, reaching a high point above 5.30% after stronger-than-expected economic data, but dropping significantly following the collapse of Silicon Valley Bank. By the end of the quarter, implied Fed rates were close to 5%, indicating that the market was roughly split between expecting a quarter-percentage point rate hike and expecting no change in policy.

What does that imply? Chair Powell commented that the impact of tightening credit conditions was equivalent to rate hikes. So, while the banking crisis was severe, it has directly slowed down the economy and appears to have reduced the need for more rate hikes. Despite the increasing uncertainty regarding future rate hikes and lending conditions, markets have shifted their focus to when the Fed will cut rates. 

Overall, that’s not bad news for stocks and bonds. Judging from the final numbers for this quarter’s performance, markets managed the bank crisis well, with the S&P 500 ending the quarter with a 7% gain, and investment-grade corporate bonds up by 4%, as displayed below. Damage was largely limited to regional banking sector, with a 25% loss. 

Asset Class Performance  

Fixed Income:  

Despite such an eventful and volatile quarter, nearly all asset classes performed well, including all fixed income ETFs we invest in. U.S. core bonds went up more than 3% in Q1. Due to a decline across the Treasury yield curve, long-duration bonds were the largest contributors to performance, with U.S. long-term Treasury bonds up more than 7%. Additionally, corporate bonds held up surprisingly well during the banking crisis, with a broad gain of over 4%., as previously mentioned. International Treasury bonds and Emerging Markets bonds also saw benefits due to a weaker dollar. 

Equities:  

Stock markets also had a good quarter despite the turmoil. ACWI returned over 7%, but there was high return dispersion among equities.  

Growth dramatically outperformed value, large-cap stocks outperformed small-cap stocks. Among equity holdings, large-cap growth was the best performing asset, with a gain of more than 14%, seeing a significant reversal from last year. However, like value stocks, dividend stocks lagged the broad markets.  

International markets performed on par with the U.S., with an overall increase of 7%. However, there was dispersion among regions, with Europe performing the best at 10.3%, followed by Asia-Pacific at 5.4%, and Emerging Markets at 4.5%. 

Lastly looking at alternatives, the concerns of credit tightening led to detracting performances from both U.S. and International REITs in our portfolios. Gold performed as a diversifying asset, increasing by 8% during the crisis and providing additional stability to our portfolios.  

Portfolio Performance 

All New Frontier’s ETF portfolios delivered positive returns in Q1, in line with broad markets. The table below shows net-of-fees performance for our Global Core, Tax-Sensitive and Multi-Asset Income ETF portfolios over multiple time periods.  

Our Global Core and Tax-Sensitive portfolios have generated returns ranging from 3-6%, with each risk profile performing in line with what one would expect -- monotonically increasing returns for a positive quarter. As stocks and bonds were both doing their jobs, 60/40 portfolios rebounded strongly from their worst-ever year in 2022.  

Due to the underperformance of dividend stocks, our Multi-Asset Income portfolios gained around 2%. The current yields provided by are up to 5%, as measured by 30-day SEC yields.   

Conclusion 

Through all the turmoil, markets have remained resilient. Equities saw a leadership shift in value and growth, while bonds are back with attractive yields. However, the ongoing economic tug-of-war surrounding inflation, recession, and the Federal Reserve policy means that volatility and uncertainty are likely to persist. While risks are unavoidable and frequently unforecastable, using disciplined processes to maintain optimally risk-controlled diversified portfolios provides an effective way for investors to navigate the market.