Q1 2023: A Wild Ride through Banking Crises...

Q1 2023: A Wild Ride through Banking Crises and Inflation Concerns

Small Cap Quality Value Review of the First Quarter of 2023 | KayneCast 214

April 19, 2023

On this episode of KayneCast Jordan Greenhouse, Managing Director and Julie Kutasov, Portfolio Manager of the KAR Small Cap Quality Value Strategy review market performance in Q1 2023 and discuss the outlook for 2023.

Q1 2023 Market Remains Positive Despite Setbacks

Julie Kutasov began the discussion by noting that the market outlook for Q1 2023 was positive for the most part as the S&P 500 rose 7 percent and the NASDAQ rose 17 percent despite large-scale layoffs in the tech sector. Concerns about a recession failed to materialize and inflation continued to ease in January creating hope among investors that the Fed would begin scaling back its rate increases. Conversely, February saw hotter-than-expected economic data and the return of fears the Fed would keep interest rates higher for longer. Despite these concerns, the market seemed on track to resume some much-needed stability.

March, however, changed the market’s cautious optimism. In the worst banking failure since the Great Recession, tech-heavy Silicon Valley Bank (SVB) collapsed over a tumultuous week, followed quickly by the failure of Signature Bank (SBNY). The banking sector suddenly looked vulnerable, and fears of a recession returned. Insight into SVB’s rapid growth and subsequent interest rate risks explained the bank’s sudden fall — factors that do not appear to impact the larger banking sector.

By the end of the quarter, the market was less skittish. Rapid re-allocation of SVB and SBNY’s assets and the FDIC’s assurances and guarantees improved market confidence somewhat.

Overall, Kutasov’s market review was a mixed bag, with stronger performance negated by “hot” economic data in February and the March banking crisis. Kutasov notes that “large cap stocks outperformed small caps, and tech-heavy growth indices outperformed bank-heavy value counterparts,” and that the Russell 2000 Value Index was “driven by names with lower earnings’ quality, weaker balance sheets, and higher volatility.”

The Small Cap Quality Value Portfolio Looks Ahead to Q2 2023

Moving into Q2 2023, Kutasov believes slowing economic growth, elevated inflation, and continued geopolitical uncertainty will impact the market. The March banking crisis will have the unintended consequences of slowing the Fed’s interest rate hikes, and may have increased the risk of a more severe downturn than expected.

Kutasov notes that the KAR Small Cap Quality Value portfolio holds several banks; however, they meet KAR’s high-quality investment criteria, and while not immune to challenges affecting the entire banking segment, Kutasov does not believe that the banks in the portfolio face the same issues as SVB and SBNY given those banks’ specific vulnerabilities. Kutasov believes slowing economic growth will cause a flight to quality among investors, making KAR’s focus on high-quality companies particularly relevant in the current market.

Listen to the podcast to learn more about the Small Cap Quality Value performance in Q1 2023, or read our complete Q1 2023 market review here KAR CIO Doug Foreman comments on market performance and provides an outlook for what’s ahead.


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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