Summary

2022 ended and one could almost hear investors breathe a sigh of relief. 2023 got off to a good start, with financial markets rebounding from the lows in 2022. Megacap companies, such as Alphabet, Apple, Meta, and Microsoft led the way in the recovery as they reported mostly strong earnings, layoffs (reducing expenses), and, in the case of Alphabet and Microsoft, new artificial intelligence (AI) tools, such as ChatGPT (it's an interesting tool, one I've enjoyed playing with, but I don't think we have to bow before our new AI overlords...yet).

Things were humming along nicely until the threat of a new banking crisis formed as Silicon Valley Bank (SVB) failed due to a run on the bank. Think "It's a Wonderful Life" but with many more venture capitalists. That, of course, is an overly simplified version of what actually happened at SVB. Many individuals and businesses were impacted negatively by the bank run. Fortunately, the federal government stepped in to guarantee all deposits at SVB and Signature Bank, another bank that collapsed, before the contagion could spread.

While the banking crisis took over the news, the debt ceiling fight in Congress got pushed to the back burner. Expect to hear a lot more about this issue in the coming weeks. Let's hope our elected officials come to their senses before they harm the economy and financial markets.

The Federal Reserve continued raising interest rates throughout the first quarter as inflation continued to cool. Based on the most recent statement from the Fed, it appears they be nearing the end of this cycle of rate hikes.

Ultimately, it was a good quarter for global markets across the board.

First Quarter 2023 Numbers

If you recall, the average diversified U.S. stock fund, which is a better measure of how we invest than the S&P 500 or the Dow, was down over 18% for all of 2022. Finally some good news for investors: The average U.S. stock fund rose nearly 6% during the first quarter. Despite the gain, investors remained cautious about domestic stocks, pulling over $68 billion from funds in that category during the quarter.
 
International stocks, down 17% in 2022, also rose during the first quarter, with the average diversified international stock fund up a little over 8%, besting U.S. stocks. International stock funds saw inflows, over $10 billion, during the quarter.

Investors, concerned about U.S. stocks, invested nearly $67 billion into of bond funds during the first quarter. The average intermediate-term bond fund, down over 13% in 2022, gained about 3.0% during the first quarter.

Returns By Broad Category

Can't read this? Here's a link to a PDF of this chart.

The chart above provides a high-level view of how the broad asset categories have fared annually from 2008 - 2022 and the first quarter of 2023 (the column labeled "YTD"). The category titled "Asset Alloc." refers to a 60% stock/40% bond portfolio (often referred to as the 60/40 portfolio).

Year-to-date, the three top-performing categories are:

1. International developed markets ("DM Equity",+8.6%).

2. Large cap U.S. stocks (+7.5%).

3. International emerging markets ("EM Equity", +4.0%).

Note how the average 60/40 portfolio's returns are squeezed in between Large Cap and EM Equity. The 60/40 portfolio isn't dead (it never was).

I love this chart and always look forward to seeing the updated version. Two takeaways:

1. Notice any patterns? If you answered "yes", we need to talk because your brain operates on a different level than mine. It's impossible to consistently predict which categories will perform best from year-to-year or month-to-month.

2. This chart is Exhibit A for why it's prudent to build diversified portfolios. Sadly, diversification means you're always having to say you're sorry because it's rare for every category to produce positive returns.

Update: Series I Bonds

Last year, from May 1, 2022 through October 31, 2022, Series I Bonds rates peaked at 9.62%. That was an amazing rate in year that was lousy for investors. Demand for bonds was so great that the TreasuryDirect website crashed.

The rate declined to 6.89% from November 1, 2022 through April 30, 2023. While not as good as 9.62%, 6.89% was still pretty good.

As the saying goes, all good things must come to an end: The new rate from May 1, 2023 through October 31, 2023 is 4.30%. Okay, this rate isn't that bad because Series I Bonds are extremely low-risk investments. The downside is the opportunity cost of investing in stocks, which had a higher return during the first quarter.

Does it make sense to invest additional money in I Bonds? If you bought I Bonds last year, should you continue to hold your I Bonds, or is it better to redeem your bonds and invest elsewhere?

Like many things in finance the answer is "it depends".

In general, Series I Bonds might be a good investment for you if:

1. Your risk tolerance is relatively low. Perhaps you're a cautious investor who can't sleep at night when the market is volatile. Or maybe you're a retiree who needs to focus more on asset preservation rather than growth.

2. You have surplus cash to invest. Let's say you've set aside enough cash to cover at least 3-6 months (or more!) of living expenses AND you are maxing out your retirement savings AND you are investing regularly in a taxable brokerage account. If you're doing all of those things and you still have cash left over than Series I Bonds might be a good, ow-risk investment.

3. You don't need the cash for a 12 months, or longer. This one is important. The minimum holding period for Series I Bonds is 12 months. If you think you might need access to the cash earlier than 12 months, you should invest elsewhere.

It's impossible to capture everyone's unique situation using the three rules above. I'm happy to help you determine if Series I Bonds are right for you. Contact me if you want to chat.