Perspective :

May 2023 Capital Markets Perspective

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Mixed signals

April was a solid month for most asset classes, apart from small cap stocks, which have been disproportionately affected by the regional banking crisis. But the stock and bond markets are increasingly pointing to disparate outcomes. Stock volatility is about as low as it’s been over the past year, measured by the CBOE VIX, and valuations remain high on both a trailing twelve-month and forward earnings basis, compared to historical averages, suggesting little concern for recession. While bond market volatility, as measured by the MOVE Index, is higher than at most points since the Global Financial Crisis and the yield curve is as inverted as it’s ever been, which screams recession. Related, at the Morningstar conference last week, former Treasury Secretary Larry Summers stated that achieving a soft landing is highly improbable because setting the right interest rate is “like adjusting the temperature of a shower in an old hotel.”

Whether or not retail investors are thinking like Mr. Summers, they seem to be voting with the bond market. On Monday, Goldman Sachs put out a note stating, “After a buying frenzy during the pandemic, we estimate retail investors started to sell stocks in February 2022. Selling continued until they sold all of their pandemic-acquired NASDAQ single stocks as of November 2022. The selling intensified in early 2023, and we estimate retail investors have now sold more than twice what they acquired during the pandemic.” Data points like that are typically contrarian, to be fair.

But back to adjusting the temperature of the shower, the Fed did as expected yesterday and raised interest rates by another 25 basis points (bps), putting the Fed Funds range at 5 to 5.25%. Chairman Powell implied that rate hikes are likely done unless there is stronger than expected growth and inflation. Well, of course, he left wiggle room, but the fact that U.S. job openings dropped to their lowest level in almost two years in March and that layoffs continued to increase says that the labor market is starting to help the cause. Additionally, the first quarter’s Gross Domestic Product (GDP) came in less than expected at 1.1%, which was well below the fourth quarter’s 2.6% increase and also helpful from an inflationary perspective. Overseas, a different, but in some ways equally welcome message came from the European Union’s statistics agency last week, which reported that the economy grew by 0.3% in the first quarter after shrinking by 0.2% in the fourth quarter, thus avoiding a recession. If they can engineer a soft landing, then just maybe…

What happened in the markets in April?


With about 64% of S&P 500® companies reporting thus far, 77% have beaten earnings estimates, and 73% have exceeded sales expectations, according to S&P, which reflects a better environment than expected going into earnings season. Margins are also holding up well, at about 11.5%. If that level is maintained, it will come in better than the last three quarters, somewhat inexplicably, given the variety of factors that should be pressuring profitability.

While returns to U.S. large caps were once again concentrated in just a few names, it wasn’t just the mega tech names that dominated during the first quarter. The five stocks that accounted for 105% of the S&P 500’s return in April included the usual suspects, Microsoft (+6.6%), Apple (+2.9%), and Meta (+13.4%), but also Eli Lilly and Exxon, which were up 15.3% and 7.9%, respectively. So, hurray for diversification?

But across the equity space, the best returns came from international developed equities. That was true for large caps, which were up 2.8%, with value besting growth, 3.2% to 2.5%, and small caps up 2.0%, where again, value outperformed growth, 2.4% vs. 1.6%. The dollar also boosted international returns a bit, with its decline contributing about 50 bps to U.S.-based investor returns.


The yield curve, measured by the 10-year minus the 3-month, continued to invert, going from -137 bps to -166 bps, while the 10-year yield barely budged, ending only four bps lower for the month. The weird action on the front end of the curve, best exemplified by the differential between 1-month and 3-month T-bills, which reached a massive 178 bps on April 21st, was driven by concerns about the debt ceiling and the possibility of default. Investors shied away from the 3-month, which appeared to be the most vulnerable.

High yield spreads came in by eight bps, investment-grade corporates tightened by four bps, and the two respective asset classes advanced by 0.97% and 0.77%. Core bonds rose by 0.62%, and long-term Treasuries gained 0.5%. Leveraged loans led all fixed-income categories with a return of 1.2%. According to Morgan Stanley and reported by The Daily Shot, CLOs (collateralized loan obligations) are buying up everything in sight in the bank loan space, both new issues and secondary market supply, which has boosted leveraged loan returns.


Sugar futures were up 22% in April, bringing their six-month advance to 65%, on rising demand and a deteriorating weather outlook, causing a run on piggy banks across the country. Word on the street is that there have been hundreds, if not thousands, of piggy bank failures, in what I’m sure were heartbreaking moments. Adults also had reason to cry in April, as coffee futures rose by 11%. Overall, commodities were off by less than a percent, with industrial metals down 3.4% and energy contracts slightly in the red.

How are Frontier strategies positioned?


Due to the complexities of attempting to generalize about 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. These 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, and long-term Treasuries. Our more conservative strategies 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.

Emerging Market equities and International Small Caps continue to hover near the tops of their respective 20-year ranges in terms of expected return, while U.S. large caps bide time near the bottom end of their 20-year range. Likewise, REITS are near their 20-year lows.


In general, our equity positioning in terms of market cap was a bit of a headwind for the month as small caps underperformed large caps both in the U.S. and abroad. However, within our large cap exposure, our lighter underweights to international developed equities were a positive, as they outperformed U.S. large caps. Within our more aggressive strategies, our meaningful positions in international small caps helped boost absolute returns, as those stocks outperformed both U.S. large and small caps. Emerging markets, on the other hand, were in negative territory and hindered absolute and relative performance. Our underweights to REITs and commodities were broadly beneficial, as was our managed futures exposure when compared to high quality bonds, given that we are using those funds in part to manage volatility that, in more normal times, we would have achieved with higher fixed income allocations.

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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.
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.



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