Q1 2023 Quarterly Commentary
Introduction
We believe that the Fed reacted too slowly in addressing inflation and, as a result, has tightened too aggressively in the face of a weakening economy and a ballooning federal deficit. As a result, we believe central banks will eventually have to back off from rate hikes and turn to a more accommodating monetary policy – if they haven’t started already.
The current market uncertainty highlights the importance of our Dynamic Cash Allocation © risk management approach in our view. We will continue to implement it in client portfolios to adjust exposure to risk assets. We believe this gives us the best opportunity to deliver better risk adjusted returns for our clients over full market cycles than more traditional investment approaches.
Q1 2023 Quarterly Commentary
In this quarter’s commentary we provide an overview of market sentiment as well as our thoughts on key market insights and provide an update on our Asset Allocation Models as of the end of the quarter. Some high-level takeaways:
- The banking crisis was caused by the aggressive interest rate hikes by the Fed and the inversion of the yield curve in our view which is causing pressure on bank margins and unrealized losses on bank balance sheets.
- The Federal Reserve introduced the Bank Term Funding Program (BTFP) to inject liquidity into the banking system to stabilize it, but further action may be required if interest rates remain high and/or if other areas of the credit markets are impacted such as commercial real-estate or other sectors that have large credit exposure on their balance sheets are impacted like insurance companies.
- The crisis could lead to the end of Quantitative Tightening and the beginning of a new period of Quantitative Easing in our opinion, resulting in a second, more severe period of inflation in most industrialized countries during the next few years.
- Investors should prepare themselves for living with higher inflation and interest rates, as well as greater macro and geopolitical risks in our view.
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