Q1 Letter - 2023
Strong Start – NaBaF (Not as Bad as Feared)
The first quarter of 2023 was a pleasant surprise in the financial market indexes, where price action can be summarized by calling the entire month of January, “opposite day” as the sectors that performed the worst in 2022 (technology) were the best performing, and last year’s winners (energy) were the new losers. In our view, this mean-reversion and recovery in both stocks and bonds can largely be explained by overly conservative positioning and bearish sentiment following the worst year since the Great Depression for a 60% stock / 40% bond portfolio. Additionally, 2023 has not been as bad as feared despite the collapse of Silicon Valley Bank and Signature Bank in early March. These two banks had a unique problem in how they mismanaged their balance sheet, coupled with a rapidly declining deposit base due to their significant overweight exposure to early stage technology companies that have not raised cash from venture capitalists at anywhere near the same rate that they did in 2020 – 2021.
Following this regional banking scare, consequently, investors flocked to safety. March 2023 likely marked the peak in rates, which is good news for asset prices, especially long duration assets (such as companies that expect more cash flow in the future, and bonds with maturities +5 years into the future).
Disinflation
The increased scrutiny and tightening in lending standards by banks is welcomed by the Fed as this will tighten financial conditions, which is disinflationary. Tightening financial conditions is exactly what the Fed has been pursuing by raising interest rates to curb inflation, which has been working. It has taken some time to bring inflation down near their 2.0% target, but the trend has been heading in the right direction since June 2022. These are the last ten annualized inflation readings after inflation peaked:
June 9.06%
July 8.52%
Aug 8.26%
Sept 8.20%
Oct 7.75%
Nov 7.11%
Dec 6.45%
Jan 6.41%
Feb 6.04%
March 4.98%
See below chart for a look at how inflation has trended over the last 70 years.
What Comes Next?
Now, financial markets will likely be in a tug-of-war and battle out two conflicting phenomena: the positive effect that lower rates have on asset prices, and the accompanying negativity of the conditions that enable disinflation (lower demand and slowing growth, potentially induced by the labor market weakening). However, it wouldn’t surprise us to see 2-3% inflation by the end of the summer, which would likely lead to the Fed pausing their rate hikes and opening the door for the next economic cycle to begin. The labor market and the consumer remain strong, and it would take a much longer tightening cycle to break that resiliency. Additionally, if the unemployment rate begins to march higher, the Fed now has room to cut the fed funds rate back to a less restrictive range, which would be stimulative for demand and thus financial markets. Thus, we believe we’re unlikely to test the former market lows seen in October 2022 anytime soon (if ever). Companies should emerge from this downcycle nimbler, and more efficient, which should lead to 2024 earnings growth of around ~12%, per current market expectations.
We remain cautiously optimistic and extremely data dependent on how we choose to allocate our strategies. We believe there are still dislocations in the market that we can take advantage of given the wide dispersion of expectations in each sector. Not all stocks bottom at the same time; many bottomed in June 2022, while many bottomed in October 2022, and some continue to make new lows – such as the regional banks. This sort of environment favors our strategy of more active investment and risk management.
We are grateful for the trust that you have placed in us, and we look forward to continuing to serve as your partner in achieving your financial goals. If you have any questions or concerns, please do not hesitate to contact us.
Information presented reflects the personal opinions, viewpoints and analyses of the employees of Mirador Capital Partners, LP, an SEC-registered Investment Adviser. The views reflected in the commentary are subject to change at any time without notice. Nothing herein constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Mirador Capital Partners, LP manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results. Visit us at miradorcp.com for more information.