Q1 2023 | Putting the Quarter-in-Perspective | Part One: Market Performance

The sudden failure of Silicon Valley Bank in March jostled investors' confidence in the market. But, the overall performance of various tech stocks in Q1, such as Tesla, Meta, Alphabet, Amazon, Salesforce, AMD, and Broadcom, served to revive optimism for the stock market's near future. Join Casey Dylan, CIMA®, Consultant, and our host Tom Romano, Head of Strategic Relationships and Product Development, in this first half of of our Q1 recap, as we discuss both market, and factor performance, in the first few months of 2023.

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Transcript:

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Good afternoon,

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 everyone. This is Tom Romano head of strategic relationships at

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 symmetry partners and joined with me. Today is Casey Dillon

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 a long time friend of symmetry and our

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 internal communication strategist. Thank you Casey for

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 joining us today. Tom is excellent to be here with you live in

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 person. Yeah, fantastic. Fantastic So today, we're gonna go

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 through our q1 2023 quarter in

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 perspective. It's been quite the

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 interesting quarter to say the least we've had

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 some volatile markets. Although

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 I'll be at some positive results. We've seen things

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 like banking collapses in the headlines. There's still of

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 course the concerns about inflation. And so

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 Casey thank you for joining us to give us some perspective

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 of what's going on in the market. So in a

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 nutshell what happened in q1 of 2023, yeah

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 in a nutshell, I'll be brief if I

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 can so if you recall

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The fourth quarter of last year, right? The

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 last year was a brutal year across a number of metrics, but

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 the fourth quarter we started to see some respite

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 from that and the first two months of the fourth quarter,

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 right? We saw markets actually rebound pretty

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 significantly in October and November and much of

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 that was driven by the sense across

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 the markets Market participants that maybe

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 the Fed was done raising interest rates, maybe

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 that the inflationary pressures that

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 we had seen in the spring of 2022. We're

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 starting to Abate and the market is

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 a forward-looking forward pricing mechanism. And so

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In the fourth quarter, that's what it did. It looked forward.

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 It started to anticipate a period when the the

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 Fed was not raising interest rates and inflation would be tamed.

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 And of course what happened in December was

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 a bit of a comeuppance for

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 those Market participants who got a little bit ahead of

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 the fed and we saw a pullback in

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 December.

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And markets responding to the fact that the FED said well, no,

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 we're pretty set on continuing to raise rates.

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 And and we think we're gonna keep them higher longer.

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As we rolled into the first quarter of this year. We saw

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 a replay of a lot of those Dynamics coming into

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 January Market participants

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 again. It's sort of

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Determined that this was the year the Fed was

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 going to stop rate and Market participants started to

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 look forward and price as if the not only

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 with the FED stop racing rates, but they would start to pull rates

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 back by the end of the year given where people

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 reading the tea leaves assumed the

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 economy would be by mid-year.

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And so you saw a really robust Rebound in

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 January for a lot of the names that have been

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 really beat up in 2022 specifically the

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 large cab growth and Tech names and

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 so there was something of a reversion to

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 the mean in terms of those names really

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 leading the charge in January. Those are

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 the names that were most beaten up in 2022. Those are the

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 names that snap back fastest in the

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 first quarter. And so January where we

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 saw for instance the S&P down 20% for

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 2022. We saw

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 a Resurgence just in the month of January the SP was up

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 like eight percent and the NASDAQ double that right just on the

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 strength of kind of those large cap Tech names and of course what happened

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 as we rolled into February the news that

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 came out on the sort of

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 economic underpinnings specifically job data for

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 January really surprised Market

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 participants because

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It was so robust. So strong it exceeded expectations. It

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 served as a really Stark reminder that we're

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 not out of the woods yet.

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And and it sent shock waves

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 across the market in the sense that everyone who

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 had said. Okay. Well now the FED is gonna have to wind this down all

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 the sudden the the realized maybe not

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 right not only is the fed maybe not gonna wind this

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 down because the economy is hotter than we thought it was but we potentially

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 risk sort of a flare-up of inflation

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 just as it was coming down and the FED may have

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 to get more aggressive in in tackling that and

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 so February saw sort of a revisitation of

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 those expectations that market participants

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 had and as we rolled into March then all

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 eyes were on the Senate

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 hearings with the the chairman

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 of the fed and based on his

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 comments Futures skyrocketed for an expectation

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 of a 50 basis point raise at

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 the end of March the Futures went up to like a 70% chance that

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 the Fed was gonna raise 50 basis points, and

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 of course what happened then you know days later.

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Started imploding right and that sort

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 of Royal financial markets and

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 the FED did end up raising rates. But

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 only by 25 basis points after they had worked to

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 sort of rescue. I don't know rescues the

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 right term but step in aggressively and calm markets

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 particularly folks who

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 had cash on deposited Banks to keep sort

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 of a contagion effect and a larger Bank Run taking place.

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 Right? So we end the first quarter with a really

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 sort of wild trip of markets shooting

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 up coming back down a lot of volatility a lot

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 of fear injected in markets in March with the

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 headlines and yet at the end of the quarter you finished up

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 pretty again pretty solidly across

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 us markets International Development markets emerging

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 markets in fixed income inequities, right?

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 We it was a it was a pretty decent first

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 quarter from a return perspective despite all of that. Yeah sure.

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 It was like it's a very interesting quarter.

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And I'd like the way you put it on the things the kind of the Resurgence of

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 these tech companies that didn't have a great year last year, but you're

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 seeing asset classes such as the energy

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 sector right who had a great year last year is to

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 use your your term of aversion to the mean right? They had

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 a tough time in the first quarter, right? Yeah. Yeah and and frankly

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 prices have been coming down in oil and gas pretty

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 consistently.

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Since last fall so we did see a continuation of that. I

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 do think and likely there's

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 more conversation to be had

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 around this but the concern that I have or

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 or would have based on

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 how markets performed in the first quarter is that

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 it was so dominated by a

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 handful of names, right? We we've seen

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 this Dynamic before where we're

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 sort of the top largest growth Tech

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 names sort of dominate performance

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 of the market and we and we saw that again in

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 the first quarter right? You think about Facebook alphabet

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 Apple Google Netflix, right?

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 All of those firms were

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 really been challenged in 2022 had a

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 nice Resurgence across the first quarter, but when

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 you dig deeper into the performance particularly here domestically what

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 you see is they were the lion

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Care of that return that we saw the market it was once again

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 the fact that these top handful of names represent twenty

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 plus percent of the overall

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 market, right? So think S&P 500 has got ostensibly 500

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 names in it the top 10 names

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 accounted for all at

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 least 80% of that return right the

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 top top five names half of it, right? So so

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 again, you're getting a lot of that return concentrated in

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 these names.

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Because they're so large disproportionately to

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 the other names in those indices

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 and it lit. It's the rising tide lifting

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 all boats, but the concern that you

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 have with that and we saw that in 2022 when the

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 air goes out of the balloon to a degree. Well that

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 can be a double-edged sword. Right if those names start

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 to pull back in valuations, you

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 could see that turn around and become an anchor pulling

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 markets down, right and that can happen very quickly just based

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 on the fact that it's so concentrated in a

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 handful of names that are all sort of in the

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 same kind of economic Waters right in terms of kind of

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 this large growth Tech, you know richly valued.

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 Yeah. It sounds a lot like me, you know, I've

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 had these conversations over the years even going back before 2022

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 coming out of the pandemic

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 and those tech stocks. They were the story they were leading

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 the charge and what I'm hearing you say, is that sort

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 of the casing q1, but that double-ed

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word is just going back 2022 would

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 be an example of if you're not well Diversified

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 that could be a painful experience it can and I'm

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 I'm reminded of

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The experience that we had coming out of the tech bubble,

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 right? So if you think about if in fact

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 the run-up invaluations in this sort of handful of

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 techniques is analogous to what we saw in

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 the late 90s.

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They were so richly valued that when the

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 tech Bubble Burst it took a decade the Lost

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 decade right of just you know, subpar returns

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 for the valuations to get

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 back to a place where markets could then start

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 to take off again. And so the concern that

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 that one might have is valuations are

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 still Rich, right? Even after 2022 on

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 a Price to Book basis very

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 expensive on a price to

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 forward earnings basis. It's expensive and

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 so it's not

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 as if these are our Bargains to

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 be had in a Marketplace that that's discounting

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 them. They are still incredibly expensive. And so

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 anything that goes wrong right if the

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 if in fact the economy runs into turbulence at

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 some point or the expectations for growth, I mean,

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 you know, we're in earning season and Netflix had sort

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 of positive numbers, but

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They sort of gave lackluster guidance for next quarters

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 growth. Right? So all you need is for for Market

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 participants to to a once again sour on the

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 prospects of these names and you're right back to it's

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 too too rich like I'm paying

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 too much today for for earnings in

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 the future that may or may not materialize right? And so

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 I've got to pay less and so the price has to come down. Yeah, right. And

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 again, I'm not suggesting that we have a lost decade

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 in front of us, but this potentially room to run

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 if markets turn and I think that's the the concern that

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 I would share with investors. That's what I

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 prepare them for. Hey, we'll take what we get. Right? We're happy

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 to get those returns, but

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This could still be valve this this, you know, we're in the third inning potentially

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 look or fourth ending. There's a lot of game left and we're

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 just gonna buckle up and be ready for it. Yeah, and what is

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 interesting what this quarter and you detect upon that I'd love to get your thoughts developed International

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 to having a very good quarter.

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 I mean when we saw these large Tech

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 names and in the past when they had their run prior to 2022, it

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 was a pretty much us dominated run up.

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Give us some commentary on what we're saying in the developed International

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 Space. Yeah, I think some of

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 it is the Resurgence of the

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strength of the sort

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 of the the companies that are there that have

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 sort of suffered through a decade of kind of sub-par performance

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 and they were in a much stronger financial

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 position. Then they

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 were for instance going into the global financial crisis, right and they

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 weren't super expensive. Right?

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 So from a perspective of they were kind of relatively cheaply

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 priced compared to

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 US stocks. And so if we look at just the performance

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 the they don't have to have that much right

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00:12:05.100 --> 00:12:09.300
 surprise upside.

240
00:12:10.300 --> 00:12:14.300
To have nice performance right across the board or

241
00:12:13.300 --> 00:12:16.200
 relatively decent performs.

242
00:12:16.700 --> 00:12:19.800
So I think people were pleasantly surprised by

243
00:12:19.800 --> 00:12:23.500
 some of the financial resilience in

244
00:12:22.500 --> 00:12:25.200
 Europe particularly coming out of

245
00:12:25.200 --> 00:12:28.900
 the effects of the the Russian Ukraine

246
00:12:28.900 --> 00:12:31.600
 conflict and looking at the impact that

247
00:12:31.600 --> 00:12:34.500
 for instance the the price of gas price

248
00:12:34.500 --> 00:12:37.100
 of oil I had in places like Germany and the fact

249
00:12:37.100 --> 00:12:40.300
 that they sort of got through that not unscathed but

250
00:12:40.300 --> 00:12:43.700
 you know, the the avoided the apocalypse

251
00:12:43.700 --> 00:12:47.000
 right the gasoline apocalypse over the course of the

252
00:12:46.600 --> 00:12:49.300
 winter right that it was relatively mild. So

253
00:12:49.300 --> 00:12:52.600
 I think that from that perspective markets sort

254
00:12:52.600 --> 00:12:55.600
 of said rewarded International developed

255
00:12:55.600 --> 00:12:58.900
 businesses with valuations that

256
00:12:58.900 --> 00:13:01.400
 seemed a little more reasonable than the

257
00:13:01.400 --> 00:13:04.000
 valuations in the US. Yeah, that makes a lot of sense and thank you

258
00:13:04.200 --> 00:13:07.900
 for that. Yeah, and and I would call I would suggest that

259
00:13:07.900 --> 00:13:10.200
 Emerging Markets are in a similar but

260
00:13:10.200 --> 00:13:14.300
 different position right again a little more financially

261
00:13:13.300 --> 00:13:16.300
 robust in terms of the underpinnings.

262
00:13:17.300 --> 00:13:20.100
Of those companies relative to where we've seen Cycles where people

263
00:13:20.100 --> 00:13:23.100
 are risk off and and sort of beating down

264
00:13:23.100 --> 00:13:26.200
 in price. I think anytime you have a lot of volatility people are

265
00:13:26.200 --> 00:13:29.700
 hesitant to take a bunch of risk. So Emerging Markets

266
00:13:29.700 --> 00:13:32.800
 could be a little more volatile as you would expect but

267
00:13:32.800 --> 00:13:35.100
 I think from evaluation standpoint there's room to run

268
00:13:35.100 --> 00:13:38.600
 as well over time relative to the US let's let's

269
00:13:38.600 --> 00:13:41.300
 look at the other side of the coin and talk a

270
00:13:41.300 --> 00:13:44.500
 little bit about bonds because that's been quite the Hot Topic lately. We've been

271
00:13:44.500 --> 00:13:47.900
 getting a lot of inquiries from advisors and investors alike

272
00:13:47.900 --> 00:13:50.700
 about the fixed income market. So give us

273
00:13:50.700 --> 00:13:52.300
 a little perspective of what's happening in.

274
00:13:53.500 --> 00:13:57.300
Global fixed income right? Well, if you recall 2022

275
00:13:56.300 --> 00:13:59.500
 was a historically bad year

276
00:13:59.500 --> 00:14:02.900
 for Boston certainly, right as as fed as

277
00:14:02.900 --> 00:14:05.500
 the FED raised interest rates are not just the FED but central banks

278
00:14:05.500 --> 00:14:08.500
 essentially around the world except for the Asian

279
00:14:08.500 --> 00:14:11.100
 China and Japan those central banks not quite

280
00:14:11.100 --> 00:14:14.600
 as much but globally central banks at the

281
00:14:14.600 --> 00:14:17.600
 impact of course of challenging the yield right

282
00:14:17.600 --> 00:14:20.900
 and as we know yield in price or are sort of inverse Lee

283
00:14:20.900 --> 00:14:23.300
 related and so as yield was pushed up by raising

284
00:14:23.300 --> 00:14:26.900
 rates price came down and and it had a pretty dramatic

285
00:14:26.900 --> 00:14:29.900
 impact across the yield curve

286
00:14:29.900 --> 00:14:32.400
 and that was globally as well the United

287
00:14:32.400 --> 00:14:32.400
 States.

288
00:14:33.200 --> 00:14:36.400
2022 pretty much a very bad. No good year for

289
00:14:36.400 --> 00:14:39.400
 Bond holders rolling into the first quarter

290
00:14:39.400 --> 00:14:42.400
 a lot of those same sort of macro dynamics that

291
00:14:42.400 --> 00:14:45.400
 we talked about with equities was

292
00:14:45.400 --> 00:14:48.500
 true to fix income as well the expectation the bond

293
00:14:48.500 --> 00:14:51.800
 market pricing that they think the FED will essentially

294
00:14:51.800 --> 00:14:54.600
 be done at some point this year raising rates

295
00:14:54.600 --> 00:14:58.100
 had the impact of markets rallying

296
00:14:57.100 --> 00:15:01.300
 to a degree and then of course when there

297
00:15:00.300 --> 00:15:04.100
 was volatility injected because of banking issues

298
00:15:03.100 --> 00:15:07.300
 you continued to see a pullback

299
00:15:06.300 --> 00:15:09.700
 on the the yield

300
00:15:09.700 --> 00:15:13.000
 right? So at at some points we saw for instance

301
00:15:12.200 --> 00:15:15.400
 the the 10 year get up over four and we

302
00:15:15.400 --> 00:15:18.500
 saw a pullback as yields come down then of course prices go

303
00:15:18.500 --> 00:15:21.400
 up. And so you saw a nice robust kind of response over

304
00:15:21.400 --> 00:15:24.500
 the first quarter of prices coming up for bonds that had

305
00:15:24.500 --> 00:15:27.500
 the impact and that was true for treasuries and corporates

306
00:15:27.500 --> 00:15:30.400
 and international bonds, right? So across the

307
00:15:30.400 --> 00:15:32.900
 Spectrum you had sort of a nice performance.

308
00:15:33.300 --> 00:15:37.100
For bonds for the first quarter. And again, it's unusual

309
00:15:36.100 --> 00:15:39.400
 for fixed income and Equity to look and

310
00:15:39.400 --> 00:15:42.100
 behave very similarly. That was one of

311
00:15:42.100 --> 00:15:45.700
 the things that was so unusual about 2022, but there's still

312
00:15:45.700 --> 00:15:48.500
 sort of Behaving the same way based on the same Outlook

313
00:15:48.500 --> 00:15:51.500
 that at some point interest rates stop going up

314
00:15:51.500 --> 00:15:54.500
 or stop getting ratcheted up by central banks.

315
00:15:54.500 --> 00:15:57.100
 And so that Dynamic is is kind of

316
00:15:57.100 --> 00:16:00.700
 floating all the boats to this degree and so

317
00:16:00.700 --> 00:16:03.500
 fixed income has had a robust first quarter.

318
00:16:04.400 --> 00:16:07.700
Remains to be seen how the rest of the year plays

319
00:16:07.700 --> 00:16:10.400
 out and and you know, frankly we

320
00:16:10.400 --> 00:16:13.200
 continued to see the a deep

321
00:16:13.200 --> 00:16:16.200
 inversion in the yield curve, especially at the

322
00:16:16.200 --> 00:16:19.100
 very shortest end of the O curve relative to the

323
00:16:19.100 --> 00:16:22.700
 10 year. And as you know that has historically sort

324
00:16:22.700 --> 00:16:25.300
 of been a warning sign of

325
00:16:25.300 --> 00:16:28.600
 potential economic stress recessions right

326
00:16:28.600 --> 00:16:32.100
 as an indicator and it has remained it

327
00:16:31.100 --> 00:16:34.100
 inverted for some time now

328
00:16:34.100 --> 00:16:37.900
 and that inversion has only gotten deeper on the shortest end. So,

329
00:16:37.900 --> 00:16:40.200
 you know again you would want to continue

330
00:16:40.200 --> 00:16:43.700
 to watch that and be cognizant of it. I think the takeaway

331
00:16:43.700 --> 00:16:46.500
 from this is much like with equities. It's best

332
00:16:46.500 --> 00:16:49.200
 to be sort of broad based Diversified. You never

333
00:16:49.200 --> 00:16:53.000
 know what part of the Yoke curve is gonna move relative to this and

334
00:16:52.900 --> 00:16:56.800
 it's good to have exposure

335
00:16:55.800 --> 00:16:58.600
 not just us treasuries, but

336
00:16:58.600 --> 00:17:01.200
 the corporates and not just us bonds, but the international

337
00:17:01.200 --> 00:17:04.300
 bonds that there are benefits built into the pricing of all

338
00:17:04.900 --> 00:17:08.400
And as we start to see a decoupling of Central

339
00:17:07.400 --> 00:17:10.400
 Bank activity, yes, they've been

340
00:17:10.400 --> 00:17:13.700
 acting pretty much in concert, but at some point central banks

341
00:17:13.700 --> 00:17:16.800
 start to peel off right and they get back to focusing on

342
00:17:16.800 --> 00:17:19.100
 the handling kind of

343
00:17:19.100 --> 00:17:22.300
 their domestic concerns. And as they do that it will

344
00:17:22.300 --> 00:17:25.600
 have varying diversification impacts for bonds

345
00:17:25.600 --> 00:17:28.500
 around the globe the way stocks and bonds behaves

346
00:17:28.500 --> 00:17:31.300
 in 2022 with similar and then into this quarter. We're

347
00:17:31.300 --> 00:17:34.500
 seeing some decent returns globally across those two

348
00:17:34.500 --> 00:17:37.800
 macro asset classes. We're seeing

349
00:17:37.800 --> 00:17:40.300
 some of a mixed bag that last Factor investors

350
00:17:40.300 --> 00:17:43.400
 from a factor perspective, right? But let's

351
00:17:43.400 --> 00:17:46.200
 shift a little bit and talk about factors for a moment.

352
00:17:46.200 --> 00:17:49.300
 We're a factor investors are listeners The Avengers that

353
00:17:49.300 --> 00:17:52.300
 we work with our have clients invested in

354
00:17:52.300 --> 00:17:55.500
 these Factor portfolios. What did we see from a factor standpoint

355
00:17:55.500 --> 00:17:58.800
 in the first quarter of 2023 if

356
00:17:58.800 --> 00:18:01.400
 you think about the factor of value, it's just the the

357
00:18:01.400 --> 00:18:04.300
 cheaper stocks outperform the more expensive stocks over time and as

358
00:18:04.300 --> 00:18:04.500
 you know,

359
00:18:04.800 --> 00:18:07.800
We had a long run where that wasn't true. Right we're

360
00:18:07.800 --> 00:18:10.300
 growth stocks were just outperforming value to the

361
00:18:10.300 --> 00:18:13.200
 point that everybody was sort of Naval gazing wondering his value

362
00:18:13.200 --> 00:18:16.800
 dead. Does this even make sense anymore? And and what

363
00:18:16.800 --> 00:18:19.400
 we sort of looking at it determined was

364
00:18:19.400 --> 00:18:22.400
 no actually values kind of in line with what it's always done. It's

365
00:18:22.400 --> 00:18:25.300
 growth. That's so unusual. Yeah, right and that we're

366
00:18:25.300 --> 00:18:28.300
 back to the story about the large tech stocks and get over evaluation. Right?

367
00:18:28.300 --> 00:18:31.900
 And so last year was a great year for Value, right? Even

368
00:18:31.900 --> 00:18:34.500
 though it was down right value outperform growth

369
00:18:34.500 --> 00:18:37.800
 by a good 20% Oh, yeah, absolutely and it

370
00:18:37.800 --> 00:18:40.700
 was sort of that Snapback to recognition of

371
00:18:40.700 --> 00:18:43.300
 hey one of my paying for right and and these things

372
00:18:43.300 --> 00:18:46.200
 have gotten incredibly overvalued on the

373
00:18:46.200 --> 00:18:46.600
 growth side.

374
00:18:47.300 --> 00:18:50.500
And so it shouldn't come as a surprise then if there's a reversal of

375
00:18:50.500 --> 00:18:53.600
 that Dynamic that value might underperform growth

376
00:18:53.600 --> 00:18:56.500
 over the first quarter. And of course, that's what we observed right

377
00:18:56.500 --> 00:18:59.300
 that value underperformed growth. It was

378
00:18:59.300 --> 00:19:02.300
 those large kind of growthy names that took off and and so that

379
00:19:02.300 --> 00:19:05.700
 that factor shows up and demonstrates

380
00:19:05.700 --> 00:19:08.300
 that thighs right. So again kind of

381
00:19:08.300 --> 00:19:11.600
 the academic research that smaller cap

382
00:19:11.600 --> 00:19:14.400
 names tend to outperform larger cab

383
00:19:14.400 --> 00:19:17.800
 names over time rolling into the first quarter large

384
00:19:17.800 --> 00:19:20.500
 caps outperform small caps, right again being led

385
00:19:20.500 --> 00:19:23.500
 by that large growthy and so small caps

386
00:19:23.500 --> 00:19:26.800
 tended to underperform in general. What's interesting

387
00:19:26.800 --> 00:19:29.300
 is across factor is

388
00:19:29.300 --> 00:19:32.300
 one of the reasons you want to hold small caps isn't necessarily the size

389
00:19:32.300 --> 00:19:35.300
 Factor premium associated with that because

390
00:19:35.300 --> 00:19:38.700
 that's come under some scrutiny of

391
00:19:38.700 --> 00:19:41.400
 Lee as academics kind of look at that. Say what

392
00:19:41.400 --> 00:19:42.200
 do we actually getting here?

393
00:19:42.900 --> 00:19:46.000
But what really expresses itself

394
00:19:45.300 --> 00:19:48.500
 in small camp names or all the other factors, right? So

395
00:19:48.500 --> 00:19:51.100
 the reason you'd want to hold a small cap is not just

396
00:19:51.100 --> 00:19:54.200
 because you get a benefit versus large caps, but because you get

397
00:19:54.200 --> 00:19:57.600
 a really strong value signal a really strong momentum really

398
00:19:57.600 --> 00:20:00.200
 strong quality, right all of these things. And so if we

399
00:20:00.200 --> 00:20:03.300
 look at small caps the performance of small caps for

400
00:20:03.300 --> 00:20:06.700
 the first quarter, you actually got to really strong quality signal

401
00:20:06.700 --> 00:20:09.700
 in small caps. So again a reason

402
00:20:09.700 --> 00:20:12.400
 why you want to have a multiple exposures for your

403
00:20:12.400 --> 00:20:15.400
 factors not just pick any one of these right so small

404
00:20:15.400 --> 00:20:18.400
 caps under form large caps, but quality did really well inside

405
00:20:18.400 --> 00:20:21.300
 small camps that makes up the next category is

406
00:20:21.300 --> 00:20:24.400
 momentum. And what's interesting about markets that are sort of

407
00:20:24.400 --> 00:20:27.500
 whipsawing one way or the other that momentum tends to

408
00:20:27.500 --> 00:20:30.400
 have a tougher time in markets where the signal is really

409
00:20:30.400 --> 00:20:33.100
 hard to pick up where there's a lot of whipsawing effect up and down on the

410
00:20:33.100 --> 00:20:37.000
 other way momentum tends to kind of get whipped around with that.

411
00:20:37.700 --> 00:20:40.200
Eventually when markets start to pick

412
00:20:40.200 --> 00:20:43.300
 up Trend whether that's down for a significant period of

413
00:20:43.300 --> 00:20:46.500
 time like in 2022 momentum does well or up right

414
00:20:46.500 --> 00:20:50.000
 for a significant period of time and so you

415
00:20:49.200 --> 00:20:52.400
 would expect momentum to kind

416
00:20:52.400 --> 00:20:55.400
 of settle down as markets kind of settle down

417
00:20:55.400 --> 00:20:59.600
 and we see less whipsawing and more directionality. However, and

418
00:20:59.600 --> 00:21:03.300
 I mentioned it earlier with small caps quality this idea

419
00:21:02.300 --> 00:21:05.000
 that there may be

420
00:21:05.200 --> 00:21:08.800
 a flight to Quality in times when the

421
00:21:08.800 --> 00:21:11.100
 there's a lot of volatility. Well one of the

422
00:21:11.100 --> 00:21:14.800
 reasons you see that is because higher quality earnings tend to

423
00:21:14.800 --> 00:21:17.400
 hold up better in downturns. They have a premium

424
00:21:17.400 --> 00:21:21.300
 associated with them and we saw that very clearly quality

425
00:21:20.300 --> 00:21:23.200
 was one of the areas that outperformed the market

426
00:21:23.200 --> 00:21:26.200
 over the first quarter and that was true not just in the

427
00:21:26.200 --> 00:21:30.200
 US but internationally as well interestingly in

428
00:21:29.200 --> 00:21:33.500
 Emerging Markets value quality

429
00:21:32.500 --> 00:21:35.600
 and low volatility did quite

430
00:21:35.600 --> 00:21:37.600
 well so value was still doing well in emerging.

431
00:21:37.700 --> 00:21:40.700
Markets again a reason why you'd want to diversify

432
00:21:40.700 --> 00:21:43.400
 your Factor exposures not just in the US but

433
00:21:43.400 --> 00:21:46.900
 internationally as well and minimum volatility was

434
00:21:46.900 --> 00:21:49.800
 a contributor in us but lagged Market

435
00:21:49.800 --> 00:21:52.500
 beta on the whole a broadly

436
00:21:52.500 --> 00:21:55.900
 Diversified Factor exposure was I'd

437
00:21:55.900 --> 00:21:58.700
 say depending on what your tilts are helpful on

438
00:21:58.700 --> 00:22:02.200
 the downside when Market was volatile, but lagged

439
00:22:01.200 --> 00:22:04.900
 Market beta to a degree for the

440
00:22:04.900 --> 00:22:07.500
 first quarter where it outperformed in

441
00:22:07.500 --> 00:22:10.400
 2022. So again factors are a

442
00:22:10.400 --> 00:22:13.500
 long term investment. You wouldn't do it on based

443
00:22:13.500 --> 00:22:16.700
 on one quarter, but we we watch the horse race, right? Yeah.

444
00:22:16.700 --> 00:22:19.200
 Absolutely and I think a point that you

445
00:22:19.200 --> 00:22:22.400
 you said that really resonated with me is the notion of how these factors work

446
00:22:22.400 --> 00:22:25.800
 together right size and quality you mentioned

447
00:22:25.800 --> 00:22:29.200
 and so having a diverse portfolio

448
00:22:28.200 --> 00:22:30.700
 of integrated factors.

449
00:22:31.500 --> 00:22:32.800
maintaining that for the long term

450
00:22:34.200 --> 00:22:37.400
Should reward you over the long term. Yeah, and that's the

451
00:22:37.400 --> 00:22:40.800
 expectation. There are lots of factors out

452
00:22:40.800 --> 00:22:43.800
 there that have been identified in the academic literature when you

453
00:22:43.800 --> 00:22:46.400
 selectively go out and pick a handful of

454
00:22:46.400 --> 00:22:49.500
 those factors. The expectation is every single

455
00:22:49.500 --> 00:22:52.500
 one of those is going to be a positive contributor to

456
00:22:52.500 --> 00:22:55.400
 your portfolio over time, right you you

457
00:22:55.400 --> 00:22:58.300
 wouldn't necessarily pick one that you thought. Well, it's gonna be a loser but we're gonna hold on

458
00:22:58.300 --> 00:23:01.100
 to it, right you're picking all of these different factors of the

459
00:23:01.100 --> 00:23:04.700
 expectation that each one of those is going to be a

460
00:23:04.700 --> 00:23:07.300
 positive contributor over a period of time when you

461
00:23:07.300 --> 00:23:10.400
 weave them together you sort of iron out

462
00:23:10.400 --> 00:23:13.400
 the highs and lows of any one particular factor and

463
00:23:13.400 --> 00:23:17.100
 you get that very nice steady stream of

464
00:23:16.100 --> 00:23:19.500
 return into your

465
00:23:19.500 --> 00:23:22.300
 portfolio. That's generated by those Factor exposures. Yeah.

466
00:23:22.300 --> 00:23:25.400
 It's the old the old adage we're going for singles and doubles

467
00:23:25.400 --> 00:23:28.200
 not home runs, right? Yeah. Yeah exactly. So let's

468
00:23:28.200 --> 00:23:31.200
 talk a little bit about factors and fixed income and then

469
00:23:31.200 --> 00:23:34.100
 we can take a look at some of the the factors overseas.

470
00:23:34.100 --> 00:23:37.800
As well, but I do want to spend some time on some of

471
00:23:37.800 --> 00:23:40.100
 the headlines. So why don't we

472
00:23:40.100 --> 00:23:44.000
 talk a little bit about us fixed income factors? Sure. So

473
00:23:43.600 --> 00:23:46.200
 as you know, right fat factors are

474
00:23:46.200 --> 00:23:49.800
 not an equity only thing. In fact, we see factors across

475
00:23:49.800 --> 00:23:53.600
 all different kinds of assets fixed income Commodities

476
00:23:52.600 --> 00:23:55.400
 housing real

477
00:23:55.400 --> 00:23:58.400
 estate, right all these I the concept of value for

478
00:23:58.400 --> 00:24:01.500
 instance and the concept of momentum right anything that has a price associated

479
00:24:01.500 --> 00:24:04.400
 with it stores can demonstrate these sort of

480
00:24:04.400 --> 00:24:07.200
 factors. And that's true. In fact fixed income the way we

481
00:24:07.200 --> 00:24:10.400
 think about factors and fixed incomes specifically is is kind

482
00:24:10.400 --> 00:24:13.400
 of interest rate risk, which is time, right? So think

483
00:24:13.400 --> 00:24:17.300
 about what we talked about with the yield curve inversion

484
00:24:16.300 --> 00:24:19.400
 and what was going on on the short end versus the

485
00:24:19.400 --> 00:24:23.500
 long end what we've observed in the

486
00:24:23.500 --> 00:24:26.200
 past. Let's call year was a really

487
00:24:26.200 --> 00:24:29.800
 strong interest rate risk lack

488
00:24:29.800 --> 00:24:32.600
 of benefit that you got for sort of being paid

489
00:24:32.600 --> 00:24:34.000
 over time, right?

490
00:24:34.100 --> 00:24:38.300
And in theory, right you should get paid to hold

491
00:24:37.300 --> 00:24:41.100
 over time because there's less certainty

492
00:24:40.100 --> 00:24:43.500
 about what the future holds so you demand a

493
00:24:43.500 --> 00:24:46.800
 premium to hold something over time to lend over time. And

494
00:24:46.800 --> 00:24:49.200
 so when you have the short end

495
00:24:49.200 --> 00:24:52.500
 of the curve come up that tends to impact that interest

496
00:24:52.500 --> 00:24:55.500
 rate sets that risk that sensitivity because you're

497
00:24:55.500 --> 00:24:58.800
 not getting paid over time. You're getting paid actually on the

498
00:24:58.800 --> 00:25:01.700
 the shorter end potentially. So when you

499
00:25:01.700 --> 00:25:04.800
 see a pullback of rates,

500
00:25:04.800 --> 00:25:07.700
 right and price is going up you're seeing

501
00:25:07.700 --> 00:25:10.800
 that benefit playing out through the first quarter as well credit risk

502
00:25:10.800 --> 00:25:13.300
 is just the difference the buildup over

503
00:25:13.300 --> 00:25:16.300
 the risk free rate treasuries to account

504
00:25:16.300 --> 00:25:19.200
 for hey, you know a corporation has more risk than a government

505
00:25:19.200 --> 00:25:22.500
 and I should be paid that difference. And so you're investing

506
00:25:22.500 --> 00:25:25.200
 up and down the various yield curves that

507
00:25:25.200 --> 00:25:28.900
 build up on that and in this case credit risk really as

508
00:25:28.900 --> 00:25:31.900
 a factor wasn't a very solid contributor

509
00:25:31.900 --> 00:25:33.200
 for the first quarter slightly positive.

510
00:25:34.100 --> 00:25:37.200
The the show really has been frankly for the

511
00:25:37.200 --> 00:25:40.500
 past 18 months were interest rate risk is in

512
00:25:40.500 --> 00:25:43.500
 terms of factor Premia in your portfolios.

513
00:25:43.500 --> 00:25:46.500
 And then Market is is again just Market

514
00:25:46.500 --> 00:25:49.800
 beta which is a buildup of all these different factors expressing themselves.

515
00:25:49.800 --> 00:25:53.200
 So on the whole positive Bond performance

516
00:25:52.200 --> 00:25:55.500
 being driven by changes to

517
00:25:55.500 --> 00:25:59.500
 the the yield curve in many cases and some

518
00:25:58.500 --> 00:26:01.400
 expectation that Bond markets are looking ahead

519
00:26:01.400 --> 00:26:04.600
 and pricing for a cessation of rate raises

520
00:26:04.600 --> 00:26:07.500
 by central banks. So so my expectation would

521
00:26:07.500 --> 00:26:10.200
 be for for fixed income investors again much like

522
00:26:10.200 --> 00:26:13.400
 Equity potentially more volatility here, right? The

523
00:26:13.400 --> 00:26:16.400
 the rodeo is not over the big bull riding

524
00:26:16.400 --> 00:26:18.200
 could yet be to come so

525
00:26:19.200 --> 00:26:22.400
You know stay patient the the benefit here is

526
00:26:22.400 --> 00:26:25.400
 there's return associated with fixed income

527
00:26:25.400 --> 00:26:29.500
 to a degree. We haven't seen in 15 years. And so

528
00:26:29.500 --> 00:26:32.700
 let this play out. And again, these Factor

529
00:26:32.700 --> 00:26:35.600
 exposures are the expectation is over time. These are

530
00:26:35.600 --> 00:26:38.100
 going to be a additive to the returns that you

531
00:26:38.100 --> 00:26:40.700
 get from the bond market you had mentioned this in some of your previous comments.

532
00:26:42.500 --> 00:26:45.400
Factors perform differently geographically too

533
00:26:45.400 --> 00:26:48.500
 right like value in the US might give you a different return

534
00:26:48.500 --> 00:26:51.300
 versus value and the international develop during the

535
00:26:51.300 --> 00:26:54.500
 Emerging Markets Arenas. So I think there's diversification story

536
00:26:54.500 --> 00:26:57.600
 there. Can you comment on that, please? Yeah. Well, yes, of

537
00:26:57.600 --> 00:27:00.100
 course and and I sort of made a comment

538
00:27:00.100 --> 00:27:01.300
 about as

539
00:27:02.300 --> 00:27:05.500
central banks become decoupled and start to operate a

540
00:27:05.500 --> 00:27:09.000
 little more independently that it has an impact on the

541
00:27:11.300 --> 00:27:14.600
local economies in all of these different markets as

542
00:27:14.600 --> 00:27:17.200
 an impact on their currencies. And so

543
00:27:17.200 --> 00:27:20.600
 when you think about fixed income the benefit that you get from

544
00:27:20.600 --> 00:27:23.300
 not only where you hold on

545
00:27:23.300 --> 00:27:26.500
 the curve and and the amount of credit that you're willing but that

546
00:27:26.500 --> 00:27:29.900
 you're going to diversify the various curves

547
00:27:29.900 --> 00:27:32.300
 that you hold and the where you

548
00:27:32.300 --> 00:27:35.900
 are on that across geographies and

549
00:27:35.900 --> 00:27:38.200
 then take into account the impact that

550
00:27:38.200 --> 00:27:42.200
 currencies might have right and so we know for equities

551
00:27:41.200 --> 00:27:45.100
 the the volatility signature

552
00:27:44.100 --> 00:27:47.100
 of equity is is so robust that

553
00:27:47.100 --> 00:27:50.600
 you're you tend to be willing to hold the volatility of

554
00:27:50.600 --> 00:27:53.900
 fluctuations and currency in in

555
00:27:53.900 --> 00:27:56.000
 fixed income. It tends not to pay you to do

556
00:27:56.200 --> 00:27:59.400
 that. And so I know for instance

557
00:27:59.400 --> 00:28:03.100
 that here at Cemetery you folks hedge back

558
00:28:03.100 --> 00:28:07.000
 to the dollar sure and that takes some of that volatility out,

559
00:28:06.600 --> 00:28:09.400
 right? And again, I think that's a benefit

560
00:28:09.400 --> 00:28:11.000
 for Factor investors because what you're

561
00:28:11.200 --> 00:28:14.300
Is less volatility associated with fluctuations currency and

562
00:28:14.300 --> 00:28:18.000
 you're getting maybe stronger signal from these these

563
00:28:17.200 --> 00:28:20.900
 different sources of return across

564
00:28:20.900 --> 00:28:23.400
 different markets and they're all going to be hitting at

565
00:28:23.400 --> 00:28:26.700
 different times. Once the sort of the global economy

566
00:28:26.700 --> 00:28:29.200
 comes unpegged to what's going

567
00:28:29.200 --> 00:28:33.100
 on fighting inflation. Yeah until I think it's a perfect diversification story

568
00:28:32.100 --> 00:28:33.300
 and

569
00:28:34.100 --> 00:28:37.600
we have a saying here that the only free lunch and investing is diversification. And

570
00:28:37.600 --> 00:28:40.900
 so we tout that investor should be embracing that Casey.

571
00:28:40.900 --> 00:28:43.400
 Thank you so much for joining us that concludes part one.

572
00:28:43.400 --> 00:28:46.600
 Please feel free to access other podcasts

573
00:28:46.600 --> 00:28:49.000
 that we have done and they can be

574
00:28:49.400 --> 00:28:52.600
 accessed anywhere you get your podcast. So please join Casey and

575
00:28:52.600 --> 00:28:56.000
 I for part two and our next series symmetry Partners

576
00:28:55.700 --> 00:28:58.800
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577
00:28:58.800 --> 00:29:01.700
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578
00:29:01.700 --> 00:29:04.600
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00:29:04.600 --> 00:29:07.500
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