March was a solid month for equity markets with the S&P500 index gaining 3.67%. Likewise, Q3 2023 produced a nice index gain of 7.50%,its second consecutive positive quarter. However, returns really depended on which market one was invested in as the Nasdaq 100 was up over 20% while the Dow Jones Industrial Average rose by just 0.38%. The biggest news for the quarter was the stability, or lack thereof, in the banking sector. The failure of Silicon Valley Bank was the biggest headline, which brought into question the strength of regional banks in general. Losses at Silicon Valley Bank and others were primarily due to the rapid increase in interest rates by the Federal Reserve.This resulted in bonds on the balance sheet experiencing unrealized losses, which turned into realized losses when the banks had to sell them to meet depositor withdrawals.
As a result of the regional bank crisis, investors became convinced that the Federal Reserve would pause interest rate hikes and possibly lower rates later this year. This in turn fueled technology stocks, and especially mega cap tech stocks, pushing prices higher. Investors seemed to turn a blind eye to other potential problems such as tightening in bank lending, continued high inflation and narrow stock market leadership. Regional banks weren’t the only ones with issues as witnessed by the forced takeover of Credit Suisse by UBS. Altogether, these concerns resulted in a volatile month of March and the belief by many that volatility will increase in the near future.
Our models performed well during the quarter, led by our Nasdaq Hybrid Momentum model which was up nearly 14%. Our S&P 500 Hybrid Momentum model also performed well with a gain of 8.54% in Q1. These gains helped propel our Diversified Portfolio to a 6.24% return for the quarter, which slightly lagged the general market. It’s important to note that over time our Diversified Portfolio has experienced downside risk (as measured by maximum drawdown) of approximately one quarter as much as the S&P 500. We are quite pleased with our strategy’s return to risk profile as one of our goals is to preserve investor capital.