Market Commentary: April 2023
I don’t like to talk about investment performance over short periods of time, but the first quarter of 2023 has given us some interesting data. I will try not to “geek out” on numbers too badly. Over the first quarter we had a reversal of 2022 themes and an echo of the previous big cycle from 2009-2020. Over that previous time the large theme was large US tech dominated everything else. That is exactly what we witnessed over the first quarter with large cap growth up over 17%. This is compared to last years winner value basically flat over the first quarter. A lot of the supporting factors were the same as the last cycle too. A banking sector problem causing interest rates to fall dramatically and the Federal Reserve balance sheet to expand. Last decade it was the Great Financial Crisis (GFC), this quarter it was Silicon Valley Bank (SVB) going under. The market reaction to reach for the old playbook is a common one. So many times, we continue to fight the last battle not recognizing that the enemy has changed.
If we just look at the macroeconomic backdrop today compared to coming out of the GFC we are at completely different places. Back then we were facing an environment characterized with too much labor, global goods supply increasing, falling interest rates, and an abundance of both credit and energy. You can argue that every single one of those factors are not in place today. We have the baby boomer generation moving into retirement depressing the labor participation rate. Global supply chains are continuing to be stressed by geopolitical movements, whether that be wars or political choices, that increase costs. The Federal Reserve has embarked on one of the fastest interest rate tightening cycles ever. While credit is still available, it has started contracting in light of the banking system stress. Then you add in that natural resources are becoming harder and costlier to acquire.
I am not trying to alarm anyone, but to just set a baseline that the environment is not the same. With this backdrop, the expectation that the same investment winners of the last decade will be this decade’s winners is difficult to believe. What has become apparent is that this current market positioning has created opportunities. AQR wrote a paper titled “Value: Why Now? Capturing the Comeback in Its Early Innings”. Within this paper they go back over 3 decades and look at the relative spread between growth and value. They come to the conclusion that growth is close to being as expensive as it ever has been within the last 30 years. The last time that growth was close to this expensive was in 1999-2000 during the Tech Bubble. After that time value outperformed growth for the next 5 – 6 years. I am not suggesting that the same will occur, but I am saying that from this starting point it makes sense to lean more value in equity holdings compared to growth. That is what we have been doing for the last couple of years. We have not left growth out but have definitely positioned for value to outperform growth. When the opposite happens, like the 1st quarter of 2023 we will lag. I look for value to outperform over a longer period of time and am not concerned with quarter-to-quarter gyrations.
If you are interested in reading AQR’s paper you can find by clicking here.
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