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Investment Strategy

April 03, 2023

Investment Strategy Brief: Spring Into a New Quarter

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Below is a transcript of this week’s video:

It was a tumultuous 1st quarter of this year, with volatility in the banking sector headlined by the high-profile failures of Silicon Valley and Signature Banks. But for all that, markets actually performed relatively well on the whole for the quarter.

Major asset classes posted positive returns to start the year. The S&P 500 enjoyed a 7.5% gain though U.S. small caps underperformed large-caps resulting in a modest gain of 2.7% in the quarter, but small-caps experienced negative results for most of the quarter until just about last week. International equity markets saw positive returns overall in U.S. dollar terms as the greenback weakened, up 8.5% in Developed markets and 4.0% for Emerging Market Stocks. Investment-grade bond markets in both taxable and municipal fixed income posted their second straight quarter of positive returns, 3% and 2%, respectively.

Within large-caps, growth stocks outpaced their value counterparts, posting 14.4% vs 1.0% respective returns. Now, this is likely due to the fact that the value indices tend to be more heavily weighted toward financials, where Russell 1000 Growth sector has about 3% exposure to financials while the Russell 1000 value has over 18%, which was a contributing factor to its underperformance during the quarter as the banking crisis has resulted in a considerable disparity between the two indexes.

Now, if we look closer into the positive performance of the S&P 500 large-cap index, although the S&P 500 posted a positive total return for the quarter, the largest six stocks in the index contributed the lion’s share of the performance. In fact, excluding those six stocks (Apple, Microsoft, Amazon, Alphabet, Nvidia and Tesla) would have resulted in a much more modest +2.3% total return for the index. After a strong month of mega-cap outperformance, those top six stocks now represent a cumulative 21.2% of the S&P 500, leading to a relatively concentrated and top-heavy index.

The S&P 500 is a market-capitalization-weighted index of large cap stocks in the U.S. The equal weighted version rebalances quarterly so that each constituent company has the same weight at the time of rebalance. This mega-cap performance led to the third largest spread in returns between the market-cap-weighted and equal-weighted versions of the S&P 500 since at least 1990s, trailing only the Covid onslaught in March 2020 and the dot-com bubble in June 2000. For simplicity we included the top 5 largest spreads, and the spread is the difference in returns from the two versions of the index.

Now, history suggests that a more evenly diversified investment approach may be relatively well positioned on a go-forward basis. After the top five months of outperformance of the market-cap-weighted S&P 500 relative to its equal-weighted counterpart, the equal-weighted approach has gone on to outperform 15.6%, on average, in the twelve months thereafter.  

So to summarize, Equities were higher in Q1 and investment-grade bonds strung together their second consecutive quarter of positive total returns, Value indices tend to be heavily weighted toward the financials sector, contributing to their underperformance to their growth counterparts. Though the S&P 500 posted a positive gain for Q1, excluding the impact of the six largest stocks would have resulted in a much more modest return. In the month of March, we saw the third largest spread in returns between the market-cap-weighted S&P 500 relative to its equal-weighted counterpart and in the 12 months following periods of such performance, more diversified approaches historically tend to outperform considerably.

And with that, thank you for listening! And please don’t hesitate to reach out with any questions.

This material is intended to review matters of possible interest to Glenmede Trust Company clients and friends and is not intended as personalized investment advice. When provided to a client, advice is based on the client’s unique circumstances and may differ substantially from any general recommendations, suggestions or other considerations included in this material. Any opinions, recommendations, expectations or projections herein are based on information available at the time of publication and may change thereafter. Information obtained from third-party sources is assumed to be reliable but may not be independently verified, and the accuracy thereof is not guaranteed. Outcomes (including performance) may differ materially from any expectations and projections noted herein due to various risks and uncertainties. Any reference to risk management or risk control does not imply that risk can be eliminated. All investments have risk. Clients are encouraged to discuss any matter discussed herein with their Glenmede representative.