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Market Commentary

Monthly Financial Markets Commentary — May 1, 2023

Stocks and bonds advanced in the month of April. Investors have largely bought into the idea that the current banking crisis will force the Fed to reduce interest rates, that any recession will be very mild, if at all, that big-tech stocks are a safe haven in an otherwise turbulent market and that artifical intelligence will power the earnings of high-tech stocks for years to come. This has driven the market to extremely narrow breadth, as a handful of high-tech stocks are responsible for all the gains in the markets. Normally this is a harbinger of market turbulance, as investors have all piled into the same stocks and driven them to very high historical multiples of earnings. To a large extent 2023 is a story of the "last being first" and the "first being last" as those stocks (and bonds) hit the hardest in 2022 have advanced the most, and those stocks that advanced the most in 2022, such as energy, have performed the worst.

For 2023 the S&P 500 Index, the capitalization-weighted broadest measure of U.S. stock market performance, has returned 9.13%. The Nasdaq Composite Index, another capitalization-weighted index, but more reflective of growth stocks, has returned 17.16%. Finally, the Dow Jones Industrial Average, a price-weighted index, has returned 3.56%. All returns are on a "total return" basis, meaning that they include dividends.

The Morningstar U.S. Aggregate Bond Index, a broad measure of the U.S. bond market, has returned 3.56% for the year, as interest rates have plummetted. Investors in aggregate do not believe the Fed will maintain high rates, especially in light of the current banking crisis, which requires the Fed to flood the banking system with liquidity. In addition, they believe inflation will return quickly to the Fed's 2.00% inflation target, or at least make significant progress towards that goal.

The sectors in the equity market that have performed the best in 2023 are Consumer Discretionary, Consumer Staples and Information Technology at 13.90%, 3.80% and 21.20%, respectively. Energy, Financials and Utilities have fared the worst at -3.20%, -3.90% and -2.50%, respectively. As stated above, this is almost the mirror image of what transpired in 2022, illustrating the dramatic move from "risk-off" to "risk-on".

The comparison of current price/earnings ratios and dividend yields as of May 1, 2023 to those of the prior year is as follows.

* based on 12-month trailing data

Current national average CD deposit yields for one-year, two-year and three-year instruments are 4.85%, 4.15% and 4.05%, respectively. This class of investments now offers some competitive yields.

Gold and crude oil most recently traded at $1,999.20 and $80.25, respectively, compared to $1,866.65 and $102.50 one year earlier. The fundamentals with respect to commodities would appear to be strong in that both short and long-term supplies are constrained, and China has come on line as a big consumer.