MARKET COMMENTARY
Markets endured a number of phases throughout the first quarter of 2023, beginning with recession fears in January, economic
overheating worries in February, and a banking crisis sparked by the failure of Silicon Valley Bank in March. Layoff
announcements were frequent at tech firms that continued paring workforces in anticipation of a softer economic environment
and competition increased between firms to take the lead in AI as they raced to embed the technology across their products and
services. Despite the heightened volatility, stocks and bonds finished positive in the quarter.
Headline inflation continued to ease throughout the quarter, though still elevated at 6% YoY, as food and energy prices
softened. On the other hand, core inflation with stickier service components such as shelter has proven resilient. Labor demand
continued to moderate painlessly, as job openings have fallen over 2 million from their peak and wage growth has softened,
whereas employment has increased by more than 2.5 million jobs above the pre-COVID peak and only a slight uptick in the
unemployment rate to 3.6%. Fed Chair Powell acknowledged “the disinflation process has started,” signaling recent
developments were encouraging but further evidence would be needed to believe inflation was headed on a sustained downward
trajectory. Following the banking crisis that prompted government action to stabilize the situation, it was noted the resulting
tightening in credit conditions could mean less work is needed on additional hikes, but Fed Officials continue to believe below
trend growth and softer labor conditions would still be necessary to bring inflation back down to target.
Intra-quarter treasury yield movements were significant as bank failures and the resulting financial stability concerns caused
investors to adjust go-forward expectations of the Fed’s interest rate path, most notably on March 13th after Silicon Valley
Bank was shut down by regulators, the 2-year Treasury yield fell 56bp, the largest 1-day move since October 1987. High yield
bond spreads narrowed by 23 bps during the quarter, the 2-year decreased from 4.41% to 4.06% (peaking at 5.05%) and the
10-year decreased from 3.88% to 3.48% (peaking at 4.08%) by the end of March. Fixed income posted positive total returns in
Q1 2023, with the Bloomberg US Corporate 1-5 Year Index up 1.68%, U.S. High Yield Corporates up 3.7%, and the Short US
Treasury Securities Index up 1.02%.
The most recent earnings season highlighted how both consumers and enterprises were pulling back, consolidating, or
redirecting their spend, causing management teams to reassess their long-term growth aspirations against the need to protect
margins in a softer demand environment. Sectors that underperformed in 2022 outperformed in Q1, led by tech,
communications and consumer discretionary, whereas sectors that had outperformed last year ended up lagging, including
utilities, energy, healthcare and ultimately financials were the worst performing sector as banking system stress and deposit
withdrawals hit the sector broadly. This enabled the Nasdaq to end the quarter up 16.8% versus the S&P 500 and Dow only up
7.5% and 0.9%, respectively. Non-US equities represented by the MSCI EAFE Index and MSCI Emerging Market Index were
up 8.6% and 4.0%, respectively.
ALTERNATIVE INVESTMENT COMMENTARY*
Hedge funds posted a positive return in the first quarter of 2023, with the HFRI Fund-of-Funds Composite index rising 2.2%.
The year started with equity indices increasing substantially amid falling bond yields. U.S. inflation slowed during the quarter,
currently sitting near 6.0%. High beta ‘Equity Hedged’ and ‘Event Driven’ strategies were among the best-performing strategies
as the HFRI Equity Hedge (Total) Index and HFRI Event-Driven (Total) Index rose by 3.4% and 1.4%, respectively.
Conversely, Macro, the best-performing strategy of 2022, underperformed heavily during the quarter as the HFRI Macro (Total)
Index fell by 3.0%. Similar to the various indices, there was a dispersion of performance across the Family Management
platform. We were pleased that most of our core managers could manage through the volatility and protect investor capital
during the quarter.
*Data taken from HFRI (Hedge Fund Research Indices) as of April 10th, 2023
This material contains the current opinions of Family Management Corporation and its affiliates (collectively, “FMC”), which may change without notice. This material is distributed for informational purposes only. It is not a recommendation or offer of any investment or strategy. Nothing herein shall be considered a solicitation to buy or sell, or an offer to buy or sell, to or from any persons in any jurisdiction where such solicitation, offer, purchase, or sale would be unlawful. Information contained herein has been obtained from sources believed to be reliable, but are not guaranteed. FMC provides no guarantees regarding the performance of any investment or strategy. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future performance and individual client results will vary. No part of this material may be reproduced in any form, or referred to in any publication, without the express written permission of FMC.
