Equity markets finished the first quarter of 2023 as they started it; in buoyant mood.

However, as the dust settles on Q1 2023, it is likely to be remembered as an extraordinary one.

As we entered the year, headline inflation had been falling and data improving, causing markets to begin to price in a ‘no landing’ scenario and a return to loose monetary conditions much sooner than was previously forecast, to the benefit of risk assets across the board.

February saw some reversal as the ‘headwind’ of strong data surprises as well as a reacceleration in core inflation numbers forced investors to once more reassess both the terminal rate and more importantly how long rates may remain elevated for; the market was back to the 2022 scenario of bonds and equities struggling simultaneously.

The prospect of rates staying higher for longer caused some cracks to appear in the banking sector in March, albeit consigned to smaller banks that had a duration mismanagement / no management issue coupled with a concentration of potentially flighty deposits. In mid-March the market had a significant wobble followed by the extremely unusual scenario in which the bond market was pricing in a banking crisis whilst equity and credit were unmoved and latterly buoyant; the Fed put is back it would seem.

The quarter as a whole has been a very positive one for risk assets, and the 60/40 portfolio, as both bonds and equities recovered significantly, even with a mini crisis punctuating the period.

The Fund returned 0.3% during the month and 5.0% over the quarter.

One investment observed during the month without calling.

If there was any remaining doubt about the Federal Reserve’s impact on markets through the addition or subtraction of liquidity, then March should have put that to bed.

In a single week, the previous 18 months of QT was undone and the market was immediately willing to look through the cracks that had appeared in the system to resume an upward trajectory. In February’s commentary it was noted that ‘investors must get used to the fact that ‘higher for longer’ is likely to remain in place until either inflation does come back down to target, which is likely to prove difficult (ceteris paribus) given structural shifts in economies, or the Fed tighten enough to break something, as they always do.’  It remains to be seen whether in the Fed’s opinion they did break something, or whether they see the SVB issue as unsystematic. The unanimous vote to raise by another 25bps in the aftermath possibly points to the latter.

Either way, it remains unlikely that there will be a pivot in policy without the economy crying out for it, and whilst the labour market remains unusually tight given the economic backdrop, the Fed will be hesitant to use the monetary policy weapons in its arsenal to fight a battle that has not yet begun. The bond market in March priced in a crisis whilst equity and credit were ‘business as usual’; one must be wrong, and the Fund should be able to produce positive returns over the medium to long term in either scenario.