Quarterly Update

The bond market had its worst quarter since 1994 as the yield on the 10-year Treasury surged 82 basis points, reaching its highest level in decades at 5.23%. The culprit was the ongoing war in the Middle East and the resulting resurgence of inflationary concerns. Against that backdrop, the equity markets performed reasonably well, with the S&P 500 gaining 2.3% and the Nasdaq Composite advancing 3.4%. The Russell 2000 small caps lagged, declining 5.7%, demonstrating that the rally was concentrated in large-cap technology and AI stocks.  Crude Oil rebounded 29%, recovering its decline from the previous quarter. There was dramatic dispersion in results across sectors, with the interest rate-sensitive sectors- Utilities, Financials, Industrials, and Housing- all suffering declines. In contrast, the Energy and Technology sectors scored double-digit gains. By size and style, Large Cap Growth stocks finished +6.4%, Large Cap Value +0.15%, Small Cap Value -5.1%, and Small Cap Growth -6.6%. Cryptocurrencies recovered from the previous two quarters of nosediving, with Bitcoin rallying 39%. Gold prices moved modestly higher, holding above $4,000 per ounce.

The U.S. Dollar showed strength, perhaps aided by rising interest rates. At Kevin Warsh’s second meeting as Chairman, the Federal Reserve increased its benchmark interest rate to a range of 3.75%–4.00%, the first hike since 2023. Additionally, the meeting had a hawkish tone as he highlighted that the Fed’s primary focus was on price stability. Thus far, the economy has shown great resilience, with record corporate earnings, a stable jobs market, and inflation holding around 3%. Nevertheless, consumer confidence has sunk back to pandemic-level lows over concerns about renewed inflation pressures and other risks associated with the war in the Middle East.

We believe the upcoming earnings season will continue to show strong results, but that elevated energy prices and high interest rates will temper investors’ enthusiasm. An end to the war would certainly be a welcome development for the financial markets and the rest of the world.

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