Inflation and Banking Crisis Impact the 2023...

Inflation and Banking Crisis Impact the 2023 Stock Market Outlook

Small Cap Core Review of the First Quarter of 2023 | KayneCast 216

April 27, 2023

In this episode of KayneCast, Jon Christensen, Portfolio Manager of the KAR Small Cap Core Strategy, discussed how market forces impacted Small Cap investing in Q1 2023 with Managing Director Jordan Greenhouse.

Q1 2023 Markets Start Strong and Hopefuly

Q1 2023 started strong, and while fears of a recession carried over from Q4 2022, the consensus was that any recession would be mild and have little impact on Small Cap stocks. Investors were cautiously optimistic and the Russell 2000 reflected these attitudes, increasing almost 10% in January. However, hot economic data in February and the March banking crisis lowered investor confidence shortly thereafter.

Collapse of Silicon Valley Bank Causes Market Jitters

The sudden collapse of Silicon Valley Bank in March, followed by the collapse of Signature Bank a week later, had ripple effects throughout the market. Investor confidence, however, quickly stabilized despite initial concerns about widespread banking vulnerabilities. Christensen attributed this to “the Fed acting swiftly and decisively in containing any possible imminent issues” and indications the broader banking sector was unaffected by contagion symptoms. Christensen noted that the collapse of Silicon Valley Bank may lead to the Fed becoming “more dovish” in its approach to interest rates, or at least “less hawkish.”

Still, the March banking crisis slowed stock market performance. Christensen observed that “global financial entities could continue to see some volatility as they move through the year.” In addition, inflation, supply chain issues, and the Russia-Ukraine war continue to add uncertainty and enhanced volatility.

February saw the Russell 2000 drop 1.7%, with another 4.8% drop in March. While these drops ate into a strong showing in January, markets still managed to end Q1 2023 stronger than they started, with the Russell 2000 finishing the quarter up 2.7%.

Christensen noted that the focus of KAR’s Small Cap Core strategy remains unchanged. KAR continues to seek out solid companies with business models that can react and persevere despite volatility—companies that can pass through pricing while maintaining high customer retention through the value-add of their products to customers.

Listen to the podcast to learn more about the Small-Cap Cap performance in Q1 2023, or read our complete Q1 2023 market review where CIO Doug Foreman reviews market performance and provides an outlook for what’s ahead in 2023.

This information is being provided by Kayne Anderson Rudnick Investment Management, LLC (“KAR”) for illustrative purposes only. Information contained in this material is not intended by KAR to be interpreted as investment advice, a recommendation or solicitation to purchase securities, or a recommendation of a particular course of action and has not been updated since the date of the material, and KAR does not undertake to update the information presented should it change. This information is based on KAR’s opinions at the time of the recording of this material and are subject to change based on market activity. There is no guarantee that any forecasts made will come to pass. KAR makes no warranty as to the accuracy or reliability of the information contained herein. Past performance is no guarantee of future results.

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