Perspective :

First Quarter 2023: Capital Markets Perspective

< Back

Crisis? What crisis?

Investors lucky enough to have been lounging on a remote beach over the last few months, leaving their screens behind (as if that’s a thing), could be forgiven for overlooking the turmoil in the banking sector while reviewing portfolio returns for the quarter. The only major asset class to post losses was commodities, which were down 5.4% as a group.  Other than that outlier, it was a solid quarter. The long-venerated but recently tarnished, 60/40 portfolio enjoyed a return of 5.7%, and those with more exposure to international developed stocks, U.S. growth stocks, and long-term Treasuries faired considerably better. Not to make light of the very real losses experienced by certain bank investors (SVB was the second-largest bank failure in U.S. history), but the quarter was a success by just about all measures.

However, the macro environment certainly didn’t get any easier to interpret. What the banking mayhem did was inject additional complexity into an already difficult situation for the Fed. Going into the month of March, Fed officials were talking up the need for more rate hikes than the market was otherwise counting on, and then over the course of a few days and at least one good old-fashioned bank run, that all changed. The Treasury, the Federal Reserve, and the FDIC all kicked into gear, as their joint statement said, “…taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system.” They were subsequently joined by Jamie Dimon, leading a coalition of eleven big banks and UBS overseas, to help save First Republic Bank and Credit Suisse, respectively (well, whether Credit Suisse was “saved” is open to interpretation). And then, just a couple of days later, the Fed backed away from the previously expected 50-basis point rate increase, choosing instead to relieve the stress on markets with a more modest quarter-point raise. The actions to shore up the banking system and the market’s belief that this chain of events may signal the end of the rate hike cycle cheered investors.

Post-FOMC (Federal Open Market Committee) meeting, evidence from the ISM Manufacturing PMI survey indicating that manufacturing activity continues to drop, with new orders, employment, and inventories all down, and customer inventories normalizing, gave the rate cut crowd additional fodder. But then, over the weekend, OPEC, led by Saudi Arabia, threw another wrench into the works by announcing that they would cut production by more than a million barrels a day. That led to a spike in oil prices, which could be expected to add to inflationary pressures, and voila, we are once again left to wonder what the “data-dependent” Fed can do to engineer anything close to a soft landing. We do wish them the best.

What happened in the markets during the quarter?


The resurgence that value stocks began to experience last year was short-lived, as growth stocks dominated both in the U.S. and abroad, across the market cap spectrum. And the biggest names were again responsible for the bulk of the S&P 500®’s performance. The index was up 7.5%, and the top six names accounted for 76% of that return (Apple made up 1.6%, Microsoft 1.1%, Nvidia 1.0%, Tesla 0.7%, Meta 0.6%, and Alphabet 0.5%). The smallest of the small, micro-cap stocks, lost 2.8%, and small value stocks shed 0.7%, as the Russell 2000 Value Index’s largest weighting is to financials, at about 24%, which were greatly impacted by SVB, etc. REITs, which have had a tough go of it over the past year or so, managed to post a respectable 2.7% gain, but that still leaves them down over 19% on the trailing one-year and places them at the bottom among major equity asset classes.

Tee-up earnings season. As companies begin to report first-quarter results, according to S&P, operating earnings are expected to come in slightly lower than in the fourth quarter, while GAAP earnings are slated to come in almost 14% higher. Clearly, the bulk of the losses written off in 4Q were deemed “non-reoccurring”; it’s curious how infrequently bad things are identified as indicative of ongoing problems. Regardless, on a full trailing twelve-month basis, 1Q operating earnings are looking to be about 6% lower than for the year ending March 2022, and GAAP earnings could be over 13% lower.


With the 10-year yield falling 60 basis points from a closing high of 4.08% on March 2nd and the 30-year shedding 36 basis points from its peak on the same day, duration was back in favor, and long-term Treasuries put up a 6.2% return for the quarter, most of which was earned in March. The junkiest of the junk, CCC and lower paper, gained 5.8% for the quarter but gave back 0.5% in March as liquidity dried up and investors ran for safety. But credit, in general, did well, both for the month of March and for the quarter. High-yield bonds gained 3.7% (1.1% in March), investment grade corporates advanced by 3.6%, with almost all of that coming in March, given their interest rate sensitivity, and leveraged loans returned about 3%. All major bond market sectors ended higher for the quarter, rebounding from what was an awful 2022.


US natural gas futures remained under pressure during the quarter, especially during March, amid robust production and elevated inventories. Natural gas futures lost just over 50% overall, including a 22% decline in March. And other members of the energy complex suffered as well, with Brent Crude (-5.2%), WTI (-5.3%), Petroleum (-5.9%), and Heating Oil (-13.8%) all posting losses. Copper, typically viewed as a barometer for the economy, struggled to find direction in the final two months of the quarter but overall gained 8.4%.

How are Frontier strategies positioned?


Due to the complexities of attempting to generalize allocation changes across our Core, Specialty, Tax-Managed, Multi-Asset Income, and Faith-Based Strategies, and the additional difficulties of properly conveying how those asset allocation changes flow through to trade-level activity, we are instead directing clients to our monthly trade summaries. Those summaries describe in detail what trade activity occurred by strategy and why.

Focusing on our Core Strategies, relative to their long-term asset allocations, which serve as policy portfolios guiding our dynamic allocation decisions, we continue to favor U.S. and international small caps, emerging market equities, managed futures, long-term Treasuries, and high-yield bonds. Our more conservative strategies are also overweight floating-rate loans. We are generally underweight U.S. and international large-cap stocks, REITs, commodities, and high-quality bonds at the asset allocation level, but differences between the asset allocations and actual exposure at the fund level can and will occur.

It’s worth noting that Emerging Market equities and International Small Caps are nearing the tops of their respective 20-year ranges in terms of expected return, while U.S. large caps languish near the bottom end of their 20-year range. Likewise, REITs are near their 20-year lows.


Given the spike in volatility from multiple bank failures, our overweights to small caps both here and abroad hindered relative performance, as larger names fared better globally. Emerging markets, while up by about 4% for the quarter, likewise hurt relative performance in several of our strategies, as they underperformed other equity categories. On the bond side, long-term Treasury exposure was quite beneficial to both absolute and relative returns, as was our overweight to high-yield bonds in several of our strategies, given that they outperformed core/high-quality bonds. Detracting from performance for the quarter were our managed futures funds, which all suffered from short-term reversals in multiple asset classes and posted losses.

Download pdf

Past performance is no guarantee of future returns. Performance discussed represents total returns that include income, realized and unrealized gains, and losses. Nothing presented herein is or is intended to constitute investment advice or recommendations to buy or sell any type of securities, and no investment decision should be made based solely on information provided herein. There is a risk of loss from an investment in securities, including the risk of loss of principal. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for an s investor’s financial situation or risk tolerance. Diversification and asset allocation do not ensure a profit or protect against a loss. All performance results should be considered in light of the market and economic conditions that prevailed at the time those results were generated. Before investing, consider investment objectives, risks, fees, and expenses. Frontier may modify its process, opinions, and assumptions at any time without notice as data is analyzed.

Envestnet licenses models from Frontier that are used in investment advisory programs sponsored by Registered Investment Advisers. In such programs, Envestnet acts as the discretionary manager for client accounts in the programs. In many cases, Envestnet manages and implements the models as received from the model provider. The performance information included herein is intended to provide you with a general understanding of how the model has performed when managed by Frontier. However, such performance information is likely to be different from the actual performance you would experience should Envestnet make changes to the models or place trades at different times, and also depending on when your account is incepted and when you make contributions and withdrawals.

Information provided herein reflects Frontier’s views as of the date of this newsletter and can change at any time without notice. Frontier obtained some of the information provided herein from third-party sources believed to be reliable, but it is not guaranteed, and Frontier does not warrant or guarantee the accuracy or completeness of such information. The use of such sources does not constitute an endorsement. Frontier’s use of external articles should in no way be considered a validation. The views and opinions of these authors are theirs alone. Reader accesses the links or websites at their own risk. Frontier is not responsible for any adverse outcomes from references provided and cannot guarantee their safety. Frontier does not have a position on the contents of these articles. Frontier does not have an affiliation with any author, company or security noted within. Frontier reserves the right to remove these links at any time without notice.

Exclusive reliance on the information herein is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions, and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell any securities, commodities, treasuries, or financial instruments of any kind. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal, investment, or tax advice. Frontier does not directly use economic data as a part of its investment process.

Any forward-looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. The estimates, including expected returns and downside risk, throughout are calculated monthly by Frontier and will change from month to month depending upon factors, including market movements, over which Frontier has no control. They are only one factor among many considered in Frontier’s investment process and are provided solely to offer insight into Frontier’s current views on long-term future asset class returns. They are not intended as guarantees of future returns and should not be relied upon in making investment decisions.

Hypothetical expected returns have certain limitations, are discussed for illustrative purposes only and it should not be assumed that actual results will match the hypothetical expected returns referred to. Unlike actual performance, hypothetical expected returns do not represent actual trading and since trades have not been executed, the results shown may have under or overcompensated for the impact, if any, of certain unforeseen market factors. Hypothetical expected returns, whether back tested or forecasted, have many inherent limitations and no representation is being made that any account will or is likely to achieve the results expected. In fact, there are frequently material differences between hypothetical expected results and actual results achieved. One of the limitations of hypothetical expected results is that they do not take into account that material market factors may have impacted the adviser’s decision-making process if the firm were actually trading clients’ accounts. Also, when calculating the hypothetical expected returns, the adviser has the ability to change certain assumptions and criteria in order to reflect better returns. There are numerous other factors related to the markets in general or to the implementation of any specific investment strategy that cannot be fully accounted for in the preparation of hypothetical expected results, all of which can adversely affect actual trading and performance. Importantly, it should not be assumed that investors who actually invest in this strategy will have positive returns or returns that equal either the hypothetical expected results expected. In addition, performance can and does, vary between individuals.

In reviewing the performance information presented here, we recommend that you consider both the returns generated and the level of risk that was assumed in generating those results. We believe that performance information cannot be properly assessed without understanding the amount of risk that was taken in delivering that performance.

Frontier provides model strategies to various investment advisory firms and does not manage those models on a discretionary basis. The performance and holdings of model strategies may vary from strategies managed by Frontier.

Inflation is the decline of purchasing power of a given currency over time. A quantitative estimate of the rate at which the decline in purchasing power occurs can be reflected in the increase of an average price level of a basket of selected goods and services in an economy over some period of time. The rise in the general level of prices often expressed as a percentage, means that a unit of currency effectively buys less than it did in prior periods.

© Morningstar 2023. All rights reserved. Use of this content requires expert knowledge. It is to be used by specialist institutions only. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted, or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information, except where such damages or losses cannot be limited or excluded by law in your jurisdiction. Past financial performance is no guarantee of future results.

It is generally not possible to invest directly in an index. Exposure to an asset class or trading strategy or other category represented by an index is only available through third-party investable instruments (if any) based on that index.

Frontier Asset Management, LLC is a Registered Investment Advisor. Frontier’s ADV Brochure and Form CRS are available at no charge by request at or 307.673.5675 and are available on our website They contain important disclosures and should be read carefully.

U.S. Large Cap Equity S&P 500 Represents US large company stocks.
U.S. Small Cap Equity S&P 600 Measures the small-cap segment of the U.S. equity market.
International Developed Equity MSCI EAFE An equity index which captures large and mid cap representation across 21 Developed Markets countries around the world, excluding the U.S. and Canada.
U.S. Growth Russell 3000 Growth A market-capitalization-weighted equity index that seeks to track 3000 of the largest U.S.-growth traded stocks.
U.S. Value Russell 3000 Value A market-capitalization-weighted equity index that seeks to track 3000 of the largest U.S.-value traded stocks.
REITS FTSE NAREIT Equity REIT A free-float adjusted, market capitalization-weighted index of U.S. equity REITs.
Investment Grade Corporates Morningstar US Corporate Bond Measures the performance of fixed-rate, investment-grade USD-denominated corporate bonds with maturities greater than one year.
High Yield Bonds Morningstar U.S. High Yield Bonds Measures the performance of USD-denominated high-yield corporate debt. It is market-capitalization weighted.
TIPS Morningstar US TIPS Represents inflation-protected securities issued by the U.S. Treasury.
Leveraged Loans S&P / LSTA U.S. Leveraged Loan 100 Designed to reflect the performance of the largest facilities in the leveraged loan market.
Long-Term Treasuries Morningstar US 10+ Yr Treasury Bond Measures the performance of fixed-rate, investment-grade USD-denominated Treasury bonds with maturities greater than ten years.
Commodities Bloomberg Commodity Broadly diversified index that allows investors to track commodity futures through a single, simple measure. The DJ-UBSCISM is composed of futures contracts on physical commodities.



Related Content