Monthly Market Update - April 2023

March Highlights:

  • S&P 500 advanced 7.5%, but not a broad-based rally. Top ten gainers contributed 88 percent of the return of the 503 companies in the index, while 220 companies declined during the quarter.
  • Intermediate and long-term bond yields continued to fall in Q1 after peaking in early November.
  • First significant economic impact of last year’s rapid rise in interest rates exhibited itself in the form of the two largest bank failures since 2008.

In March, two forces converged to shift the primary focus of the market. The lag effect of Federal Reserve rate hikes merged with the law of unintended consequences to create a new form of banking crisis. It began with the March 10 federal takeover of the Silicon Valley Bank, a favorite of venture capital and emerging technology companies -- the second largest bank failure in U.S. history. Soon two other sizable “regional” banks were in trouble. In short, the rate increases undermined the value of Treasuries and other bond investments of the banks. When large customers began withdrawing deposits, these banks were forced to initiate selling their bonds at a loss. Government intervention backing the troubled banks’ holdings has so far contained the damage.

The ensuing flight to safety drove down Treasury yields, producing solid returns for bond investors. The yield on the 2-year Treasury hit a fifteen-year high of 5% on March 8 but immediately retreated to 4% by the end of the quarter, while the 10-year retreated to 3.5% after reaching its fifteen-year high of 4.3% in October. The decline in yields caused the U.S. Aggregate Bond Index to advance 3% for the quarter. Major stock indices showed solid quarterly returns, with the S&P 500 Index advancing 7.5% behind a strong January and a late-March rally. But the rally was not broad-based: eighty-eight percent of the return was concentrated in ten companies, predominantly mega-cap tech companies that have become a new safe-haven for investors during times of crisis due to their fortress balance sheets.

Inflation, the driving force behind Fed rate hikes, edged downward during the quarter but remained stubborn. Employment remained strong. Despite the banking issues, the Fed raised interest rates by another quarter percent in March. But many saw the banking woes as doing the Fed’s work, particularly in the form of tightening credit as banks will need to pull back on lending to preserve liquidity and fund fleeing deposits.

Looking ahead, domestic and European companies are likely to face margin compression this year due to slowing sales volumes and the inability to continue passing along price increases to consumers. One economic bright spot remains China, the re-opening of its economy and the tacit acknowledgment that it needs its technology companies to grow the economy.

To put the first quarter in perspective, a year ago, the federal funds rate was still resting close to zero in the 0.25% to 0.50% range. Now we are at 4.75% to 5%, higher than current core personal consumption expenditures (PCE) inflation. Traditional economic thought is that rate increases take six to twelve months to impact the economy. March’s banking woes are one lag effect so far. The remainder of the year may continue to see volatility due to other unforeseen impacts of Fed tightening.

With interest rates continuing to rise, and the recent trouble in the banking sector, Head of Mid and Large Cap Equity, Haruki Toyama, sheds light on how these factors have impacted the markets, and where opportunities may present themselves moving forward.

“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”). MAM and MIA are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.

Any performance data shown represents past performance. Past performance is no guarantee of future results.

Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.

This website is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Although the information in this report has been obtained from sources that the firm believes to be reliable, we do not guarantee its accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the firm’s judgment as of the date of this report and are subject to change without notice.

Large Cap investing is based on the expectation of positive price performance due to continued earnings growth or anticipated changes in the market or within the company itself. However, if a company fails to meet that expectation or anticipated changes do not occur, its stock price may decline. Moreover, as with all equity investing, there is the risk that an unexpected change in the market or within the company itself may have an adverse effect on its stock. Investing in growth-oriented stocks involves potentially higher volatility and risk than investing in income-generating stocks. The biggest risk of equity investing is that returns can fluctuate and investors can lose money.

Investing in small, mid-size or emerging growth companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity.

Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.

The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

The S&P 500® Index is an unmanaged index of large companies and is widely regarded as a standard for measuring large-cap and mid-cap U.S. stock-market performance. Results assume the reinvestment of all capital gain and dividend distributions. An investment cannot be made directly into an index.

The S&P Midcap 400 is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000® Index, which represents approximately 89% of the total market capitalization of the Russell 3000 Index.

The Russell 1000® Growth Index is designed to track those securities within the broader Russell 1000 Index that FTSE Russell has determined exhibit growth characteristics.

The Russell 1000® Value Index is designed to track those securities within the broader Russell 1000 Index that FTSE Russell has determined exhibit value characteristics.

Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 11% of the total market capitalization of the Russell 3000® Index.

The Russell Midcap® Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap® Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership.

Russell Defensive Indexes® measure the performance of companies that have relatively stable business conditions
which are less sensitive to economic cycles, credit cycles and market volatility based on their stability indicators.

Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.

International Equities Definitions
The MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets countries (excluding the US) and 23 Emerging Markets countries. With 1,843 constituents, the index covers approximately 85% of the global equity opportunity set outside the US.

The MSCI EAFE (Europe, Australasia & Far East) Index is a free-float adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. and Canada.

Emerging Markets - MSCI Emerging Market Index – captures large and mid cap representation across 24 Emerging Markets (EM) countries. With 1,138 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

China - MSCI China Index - captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs).

Japan - MSCI Japan Index - is designed to measure the performance of the large and mid cap segments of the Japanese market.

Germany - MSCI Germany Index - is designed to measure the performance of the large and mid cap segments of the German market.

United Kingdom - MSCI United Kingdom Index - is designed to measure the performance of the large and mid cap segments of the UK market.

India - MSCI India Index - is designed to measure the performance of the large and mid cap segments of the Indian market.

Fixed Income Definitions
Government Bond - Bloomberg US Government Index - measures the performance of the U.S. Treasury and U.S. Agency Indices, including Treasuries and U.S. agency debentures. It is a component of the U.S. Government/Credit Index and the U.S. Aggregate Index.

Municipal - Bloomberg U.S. Municipal Index - covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.

U.S. Aggregate Bond - Bloomberg U.S. Aggregate Bond Index - is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, mortgage backed securities, asset-backed securities and corporate securities, with maturities greater than one year.

Investment Grade Corporate - Bloomberg U.S. Credit Index - measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate and government related bond markets. It is composed of the US Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supranationals and local authorities.

High Yield - Bloomberg U.S. Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Bloomberg EM country definition, are excluded.

Weighted Avg. Market Cap: measures the size of the companies in which the portfolio invests. Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its price per share.

Price-to-Earnings (P/E) Ratio: measures how expensive a stock is. It is calculated by the weighted average of a stock’s current price divided by the company’s earnings per share of stock in a portfolio.

Dividend Yield: the portfolio’s weighted average of the underlying portfolio holdings and not the yield of the portfolio.

A basis point is one hundredth of a percent.

Upon request, Madison may furnish to the client or institution a list of all security recommendations made within the past year.