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“Interest rates are to asset prices what gravity is to the apple. When there are low-interest rates, there is a very low gravitational pull on asset prices.”  (Warren Buffett)

Q1 Review

Markets had an odd three months against a changing economic backdrop. The quarter began with inflation fears but ended with banking fears. Smaller, more speculative stocks with low/no earnings led in January, while well-known technology giants led in March.

In between, we had a swift collapse in several large banks that had mismanaged their balance sheet. Silicon Valley Bank, Signature Bank, and First Republic troubles were not random events. Still, at this point, they don’t appear to signal systemwide risk despite the industry suffering in 2022.

Outside of impacting holders of those specific securities, the most significant impact of the banking mini-crisis was an abrupt shift in interest rate expectations. After a year of nonstop rate hikes by the Federal Open Market Committee (FOMC), the banking episode revealed how those hikes directly impacted a few banks. As a result, with a desire to keep the crisis from spreading, the Federal Reserve and Treasury Department quickly supplied funding to ensure this wouldn’t turn into 2008-09.

As we exit the first quarter, markets face a different threat: a slowing economy. As a result, the focus is more on “How will the economy hold up?” versus “How will the Fed stop inflation?”. With a different set of risks to manage and opportunities to pursue, we’ll touch on a few themes that have our attention.

Risks and Outlook

The starting point for analysis is in Mr. Buffett’s quote above that the ultra-low interest rate environment facilitating unchecked risk-taking is mainly gone. While that primarily impacts highly speculative market areas where we don’t tread, it’s still important to recognize the higher hurdle rates existing for investors and business decision-makers. Here are a few charts to help with perspective. First, a few positives:

Source: Sam Ro as of March 2023

Especially in manufacturing:

Consumers remain flush:

Source: Vanguard as of March 2023

And a few concerns:

Concentrated Market Gains

After the US dollar’s big rally in 2022, what is next?

Tax refunds falling:


We’ll always have uncertainty and a mix of positive and negative events. Equally important is the reminder from the legendary Howard Marks that “It’s not what you buy, it’s what you pay for it.” On that front, the data is mixed.

Slightly Undervalued?

Or just less overvalued?

Source: Ned Davis Research as of March 2023

Actions Taken

As you know, we renovated our defensive sleeve starting in 2020 to account for the risks (and lack of compensation) in traditional bonds. While that served us well, the dramatic rise in rates finally makes bonds more attractive.

To take advantage of the opportunity, we’ve increased the duration of our defensive sleeve to slightly underweight. Duration measures the sensitivity to interest rate changes. We’re no longer as concerned about rates rising significantly after their already-significant rise, so we made the following moves:

  • Trim Aptus Defined Risk ETF
  • Trim Schwab Short-Term Treasury ETF
  • Buy iShares Aaa-A Rated Corporate Bond ETF

Schroders International Stock Fund and Stone Ridge Diversified Alternatives Fund, two active managers, made significant portfolio contributions and outperformed their category peers this quarter.

In addition, a few longer-term themes have our attention. No imminent trades are planned, but we’re thinking through the implications of the following:

Employment Trends

The Fed has been trying to cool the economy and prevent wages from spiraling higher. Immigration may help the supply side for employers:

Tech Trends

The transition from Web 3.0 to Metaverse to Artificial Intelligence (AI) is harder to exploit through individual securities. Still, we think the implications could be meaningful and think about it at the portfolio level as follows:

  • Our defensive sleeve is designed to be protected from market disruption
  • Our growth sleeve is designed to participate in tomorrow’s economy not yesterday’s

We’ll watch developments to see if productivity gains can be significant enough to impact rates and, ultimately, asset prices.


The forces driving markets are endless, so we always consider all scenarios and take a weight-of-the-evidence approach. We intentionally designed separate growth and defensive sleeves to be sure we have the flexibility to be prepared for all outcomes. The graphic below gives Apollo’s take on the possible economic paths ahead:

We feel good about how we’ve positioned portfolios for each outcome and view our investment committee’s thought diversity and flexibility as assets in our service to you as clients. Now on to the 2nd quarter.


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