Q1 returns were a function of 3 phases -A goldilocks rally in January (reflecting optimism that a recession would be avoided, and the Fed were almost done) followed by a sharp decline (from the start of February to mid-March) driven by concerns over both a hawkish Fed and bank contagion angst. Finally, late March saw a strong rally as the 'fear trade' dissipated.

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Exhibit 1: The return for the FT Wilshire 5000 index

^{Source: Wilshire. Data as of March 31, 2023.}

Q1 saw US banks underperform regional peers following the SVB collapse

The collapse of Silicon Valley Bank (SVB) in early March generated global contagion angst resurrecting 2008 GFC redux risk aversion in markets. Exhibit 2 shows that US banks saw the largest relative performance decline compared to other regions in Q1.

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Exhibit 2: The relative performance of the bank sector across the regions in Q1

^{Source: Refinitiv. Data as of March 31, 2023.}

However, declining real yields and interest rate expectations buoyed risk appetite

The market response to heightened bank contagion risk was to price in a big decline in year-end interest expectations (reflected in the decline in 2-year bond yields) and a weakening in real yields. Once contagion angst started to dissipate by mid-March, easing financial conditions became the key driver behind the subsequent rally in risk appetite that saw the FT Wilshire 5000 post a +2.7% return for the month.

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Exhibit 3: 2-year bond yields declined sharply

^{Source: Factset. Data as of March 31, 2023.}

The rally in the Technology and the Growth style were the key features of Q1 performance

Rather than the emergence of bank contagion concerns, the key feature of Q1 performance was the strength of the recovery in Technology stocks. Exhibit 4 shows the relative performance of the technology sector and the relative performance of the growth style versus value. The performance of technology and growth style (long duration equity trades) is closely correlated to movements in US real yields. The positive inflection in Q1 was connected to signs that US real yields had peaked.

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Exhibit 4: The relative performance of the technology sector, Growth style vs real yields.

^{Source: Wilshire, Factset. Data as of March 31, 2023.}

The dominance of the tech sector contribution in Q1 a mirror image of the 2022 profile

Exhibit 5 shows the sector-weighted performance contributions (the combined impact of sector weight and sector performance) for the FT Wilshire 5000 for Q1 vs the whole of 2022. The combined contributions for the technology and digital information sectors in Q1 accounted for the majority of the 7.3% for the index. This is a mirror opposite of the negative contributions they generated in 2022.

It can also be seen that the negative contribution for financials (this includes banks) was relatively small in Q1.

The tech rally trumped bank angst in Q1

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Exhibit 5: The decomposition of market returns - 12months and YTD.

^{Source: Wilshire. Data as of March 31, 2023.}

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