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Stembrook Market Review - First Quarter 2023 Thumbnail

Stembrook Market Review - First Quarter 2023

Market Updates

Since our most recent brief, a lot has unfolded in the wake of the failures of Silvergate Bank, Silicon Valley Bank (SVB) and Signature Bank. Most notably, contagion spread across the Atlantic to Europe, where UBS announced that they would acquire Credit Suisse at a deep discount to market value in an emergency rescue. This was after the Swiss National Bank announced that they would provide support for Credit Suisse. In the United States, the 11 largest banks pledged up to $30 billion to support the faltering First Republic Bank. Most recently, First Citizens Bank announced that they would acquire Silicon Valley Bank. This situation is still unfolding and we continue to monitor the situation. 

Despite concerns about banks and various economic indicators pointing toward signs of a slowdown, stocks had a strong start to the year, up 6.9%.1 After a difficult year in 2022, U.S. bonds continued to recover in the first quarter of 2023, up 3%.2

As the federal reserve has worked to tame inflation, they have pushed interest rates to higher levels (see table below). Higher interest rates have a tendency to slow the economy, as it becomes more expensive for companies and individuals to borrow funds for capital expenditures and to finance purchases. At the same time, savers are rewarded because the interest rates they receive on their bank deposits or money markets are higher. This also presents opportunities for fixed income investors to earn higher yields on their investments, a scenario that has rarely presented itself in over a decade.

Rising Interest Rates

Rising interest rates have presented opportunities for investors holding cash and fixed income investments

Our proprietary models forecast long-term, pre-tax returns ranging from 3% to 5% for fixed income-like asset classes and 9% to 11% for equity-like asset classes (see Expected Market Returns and Risks table). We maintain target weight allocations to equities and fixed income. Our more detailed observations and current portfolio positioning are outlined in the following comments. 

Expected Market Returns and Risks 7-10 Year Horizon

A sampling of return expectations produced by our models. Expected returns are projections and are not guaranteed.  

Historical Market Returns

Historical market returns as of March 31st, 2023. Note that looking backwards at recent returns is not a reliable method of predicting future returns. 

Yield Across Asset Classes

Yields are an indicator of future returns. Orange dots show current yields, blue bars show historical ranges. Bond yields are generally low versus historical range.

 Economic Backdrop

  • In their April release, the IMF projected that global economies would grow at a 2.8% annualized pace in 2023, adjusted for inflation. This comes off 3.4% growth in 2022.3
  • Inflation remains sticky on a global level, but is beginning to show signs of retreating. The IMF expects inflation to remain elevated at 7% in 2023 and drop to 4.9% in 2024.
  • Despite rising oil prices as a result of the most recent OPEC cut, inflation in the United States continues to slowly decline, rising at a 5% year-over-year pace in the first quarter.4
  • Emerging economies are not immune to slower world growth, the IMF expects these economies to growth by 3.9% in 2023, down slightly from 4% growth in 2022.3
  • The Federal Reserve, having forecasted a recession beginning later this year, has not signaled that they will pause or begin lowering interest rates. The fed remains committed to keeping inflation under control, despite growing signs of weakness in the economy. 
  • Global purchasing manufacturer’s indices for both service and manufacturing rebounded in March. The overall composite has returned to a level above 50. A level above 50 indicates expansion, while a level below 50 indicates contraction.5


  • The dollar continued to depreciate in the first quarter down -1.9%.6


  • After a year of outperformance by value stocks, growth stocks bounced back in the first quarter, up 9.6%7 versus a 5.2%8 return on value stocks. Much of this outperformance is attributable to the surge in mega-cap tech stocks, which struggled in 2022. 
  • Developed Non-U.S. stocks continued to have strong performance, up 8.5% in the quarter.9
  • Emerging markets equities trailed, but still had a positive return, up 4% in the quarter.10
  • Banks faced scrutiny during the course of the first quarter due to bank failures in the U.S. and the emergency purchase of Credit Suisse. On a global level, bank stocks fell by -3.1 in the first quarter.11

Fixed Income

  • Bond prices recovered in the first quarter as signals indicated that the Federal Reserve was closer to ending, or at least pausing rate hikes with inflation beginning to abate and signs of a slowing economy.
  • High yield bonds were up 3.6% in the quarter.12
  • Municipal bonds underperformed investment grade slightly, up 2.8% in the quarter.13

Global Asset Class Returns

Returns are arranged in columns, by year. Each color represents a different asset class. Each year, the leaders and laggards tend to shift. Diversification across a range of asset classes can smooth returns and enhance growth.

Current Positioning

  • Out of an abundance of caution, we have shifted our cash in traded money market funds from a prime fund, which holds a combination of commercial paper, repurchase agreements, CDs and Treasuries to one that holds Treasuries, backed by the full faith and credit of the U.S. government. We sacrificed very little in yield by making this transition. 
  • We have sold our inflation-linked bond positions for taxable and tax-deferred investors as the yields have become less attractive than nominal treasuries on a relative basis.
  • We maintain our neutral duration position in the fixed income portfolio as interest rates have risen to levels that are closer to historical averages.
  • We maintain our overweight to developed non-U.S. and emerging market equities, where valuations and long-term return potential remain attractive. 
  • We also maintain our underweight to large cap U.S. equities. 
  • We favor lower priced, value-oriented equities, both in the U.S. and abroad, which tend to outperform the broad market over time, with less volatility. These investments outperformed in 2022. A number of our international and emerging markets managers outperformed their specific benchmarks by wide gaps in 2022 and are enthusiastic about their positioning going into 2023.

We continue to focus our efforts on helping you meet your financial objectives by following our disciplined investment approach. Our approach uses return and risk models, incorporating fundamental valuations and tax-efficient strategies. This investment discipline is tailored to your individual situation in our continuing effort to craft and implement your customized investment solution. 

As always, we thank you for placing your trust in our investment management and advice and welcome your questions and comments at any time.

Peter & Tom


Endnotes and Sources:


  1. Morningstar: MSCI ACWI All Cap NR USD. 12/31/22-3/31/23.
  2. Morningstar: Bloomberg US Aggregate TR USD. 12/31/22-3/31/23.
  3. IMF World Economic Outlook: April 2023.
  4.  Bureau of Labor Statistics: CPI For All Urban Consumers. 3/31/23.
  5. JP Morgan Asset Management: Markit Global Purchasing Managers Index for Manufacturing and Service. As of 3/31/23.
  6. Barchart: $DXY—U.S. Dollar Index. 12/31/22-3/31/23.
  7. Morningstar: S&P 500 Growth Total Return. 12/31/22-3/31/23.
  8. Morningstar: S&P 500 Value Total Return. 12/31/22-3/31/23.
  9. Morningstar: MSCIE EAFE NR USD. 12/31/22-3/31/23.
  10. Morningstar: MSCI EM NR USD. 12/31/22-3/31/23.
  11. Morningstar: MSCI ACWI/Banks NR USD. 12/31/22-3/31/23.
  12. Morningstar: Bloomberg US Corporate High Yield TR USD. 12/31/22-3/31/23.
  13. Morningstar: Bloomberg Municipal 5 Year Total Return. 12/31/22-3/31/23.


Rising Interest Rates: As of 3/31/23. 

Source: Federal Reserve, Stembrook Research. 

Expected Market Returns and Risks, 7-10 Year Horizon: As of 3/31/23.

Source: Stembrook Research.

(1)  Volatility is measured in terms of Standard Deviation. Standard deviation is the statistical measurement of dispersion about an average, which depicts how widely a stock or portfolio’s returns varied over a certain period of time. Investors use the standard deviation of historical performance to try to predict the range of returns that is most likely for a given investment. When an investment has a high standard deviation, the predicted range of performance is wide, implying greater volatility. If an investment’s returns follow a normal distribution, then approximately 68 percent of the time they will fall within one standard deviation of the mean return of the investment, and 95 percent of the time within two standard deviations. For example, for a portfolio with a mean annual return of 10 percent and a standard deviation of two percent, you would expect the return to be between 8 and 12 percent about 68 percent of the time, and between 6 and 14 percent about 95 percent of the time. Source: Morningstar.

Historical Market Returns: As 3/31/23.

Source: Morningstar, Stembrook Research.

Indices: Bloomberg Barclays U.S Treasury Bills 1-3 Month Total Return, Bloomberg Barclays Municipal Bond 5 Year (4-6) Total Return, Bloomberg Barclays U.S. Aggregate Bond Total Return, Bloomberg Barclays U.S. Corporate High Yield Total Return, FTSE All Equity REIT Total Return, S&P 500 Composite Total Return, S&P SmallCap 600 Total Return, MSCI EAFE Total Return, MSCI EM (Emerging Markets) Total Return, Consumer Price Index – U.S., S&P 10 Year U.S. TIPS Total Return, Bloomberg Commodity (Total Return) Index.

Yields Across Asset Classes: As of 3/31/23.

Sources: Cash Equivalents Yields since March 1976. Ibbotson, Federal Reserve Bank, Thomson Reuters, Municipal Bond Yields since March 1988. Barclays Capital, Charles Schwab, BofA Merrill Lynch, Standard & Poor's/Investortools Municipal Bond Indices, Investment Grade Bond Yields since March 1976. Barclays Capital, High Yield since December 1984. BofA Merrill Lynch, Barclays Capital, Real Estate (Public) Earnings Yield since March 1976. NAREIT all Equity, Large Cap U.S. Equity Earnings Yield since March 1976. Standard & Poor's, BARRA, Mid Cap U.S. Equity Earnings Yield since June 1991. Standard & Poor's, BARRA, Small Cap U.S. Equity Earnings Yield since December 1993. Standard & Poor’s, BARRA, Developed Europe Equity Earnings Yield since March 1976. MSCI Europe, Standard & Poor's Europe 350, Developed Pacific Equity Earnings Yield since March 1976. MSCI Pacific, S&P/Citi PMI Asia Pacific, S&P Asia 50, Emerging Market Equity Earnings Yield since December 1998, Inflation-Linked Bond Real Yield to Maturity since March 1997. Citi Yield Book, Federal Reserve Bank. Note: Yields are not perfect predictors of future returns and should not be used in isolation.

Global Asset Class Returns: As of 3/31/23. 

Source: Thomson Reuters, Bloomberg, Morningstar, Stembrook Research.

Indices: Consumer Price Index – US, U.S. 30-Day Treasury Bills, Bloomberg Barclays U.S. Treasury Bills: 1-3 Month Index, Citigroup Inflation-Linked Index, S&P 10 Year US TIPS Index, Bloomberg Barclays U.S. Aggregate Bond Index, BofA Merrill Lynch U.S. High Yield Cash Pay, Bloomberg Barclays U.S. Corporate High Yield Index, Dow Jones Wilshire REIT Index, FTSE All Equity REIT Index, S&P 500 Composite Total Return, S&P SmallCap 600 Total Return, MSCI EAFE Index, MSCI EM (Emerging Markets) Index, Dow Jones AIG Commodity (Totl Ret) Index, Bloomberg Commodity Index.


This material is intended to inform you of products and services offered by Stembrook Asset Management, LLC (“Stembrook”). Stembrook is a New Jersey Registered Investment Advisor.

This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. The opinions, estimates, and investment strategies and views expressed in this document constitute the judgment of Stembrook, based on current market conditions and are subject to change without notice. The investment strategies stated here may differ from those expressed for other purposes or in other context.

 Past performance is not indicative of future results.

The obligations and securities sold, offered, or recommended are not deposits and are not insured by the FDIC, the Federal Reserve Bank, or any governmental agency.

The views and strategies described herein may not be suitable for all investors. This material is presented with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax adviser concerning such matters. 

Important note regarding Stembrook’s capital market expectations.

The capital market expectations developed by Stembrook Asset Management are estimates of both a central tendency of asset class behavior and a probable range of asset class behavior over a long-term horizon. These estimates are one of many inputs used in the portfolio construction process, and should not be used independently. These expectations should not be construed as the returns that will be achieved, but merely those that may be achieved if certain assumptions hold true. Also note that each client's portfolio may differ given specific goals and constraints applied to the portfolio construction process. 

Additional information is available upon request.