Market and Portfolio Update Q2 2023

  • Private Banking
BBH Private Banking Co-Chief Investment Officers Suzanne Brenner and Justin Reed review the markets and provide an update on our current portfolio positioning and priorities.

Q1 2023 in Review

Despite concerns over inflation and turmoil within the banking industry, the S&P 500 Index posted a gain of 7.5% in the first quarter, building upon 2022’s fourth quarter positive return of 7.6%. The S&P 500 Index started the year with its strongest January performance since 2019, up 6.3%, but declined in February due to a stronger than expected core services inflation reading and hawkish Fed commentary. March saw a sharp increase in market volatility as two FDIC insured banks went bankrupt (Silicon Valley Bank and Signature Bank) and a forced merger between two of the largest Swiss banks (Credit Suisse was taken over by UBS) transpired. Notwithstanding these developments, the S&P 500 generated a positive return in March as well.

Investment Returns as of Mar 31, 2023

Asset Class

3 Months

1 Year

3 Years *

5 Years *

10 Years *

Fixed Income          

1-3 Year Treasury Bonds






U.S.  Aggregate Bonds






Global Aggregate Bonds (USD - unhedged)






U.S. Municipal Bonds






U.S. High Yield Bonds






U.S. Leveraged Loans






U.S. Inflation-Linked Bonds







Global Equity (USD)






U.S. Large Cap Equity






U.S. Small Cap Equity






Nasdaq Composite






Non-U.S. Developed Equity (USD)






Emerging Markets Equity (USD)






Non-U.S. Developed Equity (Local)






Emerging Markets Equity (Local)

























Crude Oil












Alerian MLP






* Annualized return figures
Past returns do not guarantee future results
Source: Bloomberg

In the U.S., the Nasdaq Composite, which is comprised primarily of technology and other fast-growing companies, returned 17% -- its highest quarterly return since June 2020 (30.9%). The Nasdaq was particularly hard hit in 2022, declining 32.5% as a result of extraordinary interest rates increases, which led to significant multiple contraction. However, the first quarter of 2023 witnessed a downward shift in the outlook for interest rates. Turmoil in the banking sector was a catalyst for investors to begin pricing in rate cuts during the second half of 2023, causing real rates to decline by over 40 basis points.1 Interestingly, some of the biggest detractors last year within the Nasdaq Composite were this quarter’s largest contributors, such as mega-cap tech software and hardware companies.

Turning to sector returns within the S&P 500, there was a noticeable shift in leadership in Q1. As seen in the chart below, last year, energy was the best performing sector while communication services, consumer discretionary, and technology were the largest decliners. Fast forward to 2023, the sectors that performed the worst in 2022 are among the best performing sectors while energy is the second worst.

Past performance does not guarantee future results. 

Q1 2023 2022
Financials -5.6% S&P 500 -18.1%
Energy -4.7% Tech -28.2%
Health Care -4.3% Comm Services -39.9%
Utilities -3.2% Cons. Disc -37.0%
Cons. Staples 0.8% Materials -12.3%
Real Estate 1.9% Industrials -5.5%
Industrials 3.5% Real Estate -26.2%
Materials 4.3% Cons. Staples -0.6%
S&P 500 7.5% Utilities 1.6%
Cons. Disc 16.0% Health Care -2.0%
Comm Services 20.5% Energy 65.4%
Tech 21.8% Financials -10.6%

At BBH, we focus on owning quality businesses at a discount to intrinsic value. We broadly define high quality businesses as companies with: (1) high returns on equity, (2) long runways for growth and improving profitability, (3) solid balance sheets with low financial leverage, and (4) strong management teams who are disciplined capital allocators. As a result, our equity portfolios were underweight energy, as our managers believed that such cyclical companies were not as attractive on a long-term basis as the quality names in their portfolios. As markets rebounded in the first quarter 2023, the types of high-quality names owned by many of our managers outperformed, with the MSCI USA Quality Index returning 10.3% vs. 7.5% for the S&P 500. Notably, these same high quality names returned -23% in 2022 compared to -18% for the S&P 500.

Outside of the U.S., the MSCI EAFE Index (developed international equities) outperformed the S&P 500, returning 8.5%, the second consecutive quarter of outperformance. This is the first time since 2017 that developed international equities have outperformed the S&P 500 for two consecutive quarters. Within the EAFE Index, France and Japan were the largest positive contributors. Emerging markets equities returned 4%, with Taiwan and China being the largest positive contributors. On a sector basis, there was a similar story to the U.S. in that the technology sector generated the highest returns during the quarter.

Fixed Income

In first quarter 2023, the fixed income markets went through a significant resetting of interest rates. During January and February, the Federal Reserve increased rates by a combined 50 basis points to a targeted range of 4.75-5.0%, its highest level since August 2007. However, following the banking crisis in March and a narrative shift that the Fed’s interest rate hiking cycle could be coming to an end, yields declined significantly on Treasuries longer than 2-years in duration. The 2-year Treasury yield declined by over 120 bps during the month of March, its largest peak-to-trough move since October 1987. These rate moves resulted in elevated levels of volatility in the U.S. Treasury market. The Bloomberg U.S. Aggregate Bond Index, which is a broad-based flagship benchmark that measures the investment grade, fixed-rate taxable bond market, advanced 3% during the quarter, its largest quarterly advance since March 2020.

At BBH, our fixed income portfolios have been overweight short duration bonds for several years, largely in response to a period of historically low interest rates. As rates began to rise, we opportunistically extended duration. However, we continue to believe that being patient in fixed income, as opposed to reaching for yield, will pay off. While it is impossible to know what will happen in 2023, we will stand ready to take advantage of opportunities when and if interest rates and or credit spreads provide them.

Portfolio Positioning

During such challenging times, we are continuing to reevaluate our asset allocation, manager selection, and underlying investment holdings. We continue to stress-test our portfolios in various ways, actively engaging with our managers to ensure that the underlying fundamentals of the businesses they own are strong and growing and that their investment theses remain intact. We believe that over the long-term, the market will recognize the underlying value of these businesses, but in the short-term, stock prices might not be reflective of company fundamentals. We cannot predict what the markets will do, but what we do know is that a long-term, disciplined investment approach that is grounded in fundamental research and is not reactive to short-term noise is the best way to preserve and compound capital over time.

As with prior quarters, in response to many questions from clients, we sat down with Brown Brothers Harriman (BBH) Private Banking Co-Chief Investment Officers Suzanne Brenner and Justin Reed to hear their thoughts about the current state of the financial markets and how developments are influencing portfolio positioning.

Q: Year-over-year growth in inflation appears to have peaked last June at 9.1%. How long do you think it will take for inflation to reach the Fed’s 2% target? How is the Investment Research Group (IRG) thinking about portfolio construction in light of the potential for sticky inflation?

Within IRG, we always consider a range of potential macroeconomic outcomes when building a portfolio. Our job is to create portfolios that can perform well regardless of the macroeconomic environment – and that can prosper under a wide range of economic outcomes.

Our objective is to preserve and grow our clients’ purchasing power over the long term, meaning we want to generate returns greater than the rate of inflation. For context on just how impactful even a low level of inflation can be, over a 25-year period, a 2% rate of inflation results in a 40% loss of purchasing power when all else is equal. We’re investors first, not macroeconomists, but we always consider risks like inflation when constructing portfolios. Headline inflation has declined nine months in a row, which we view as positive, but that is only half the battle as the Fed has indicated they want to reduce inflation to a 2% target rate. We are of the view that it is much easier to go from 8% inflation to 5% than it is to go from 5% inflation to 2% inflation. Our own historical analysis, using a peer group of several developed countries, including the U.S., shows that when inflation surpasses 8%, it takes approximately seven years to go to 5%, but once it surpasses 5%, it takes approximately ten years to reach 2%. Historically, the U.S. has taken approximately eight years for inflation to decline to 2% once it surpassed 5%. Assuming the current eight-year period was predictive, headline inflation would reach the Federal Reserve’s 2% target around July 2029, after reaching the 5% rate in May 2021.

So while we think it would be great – and possible - if inflation came back down to 2% in a year or so, we recognize that that scenario may not occur. The question then becomes “what’s the probability that inflation is “more sticky” than most investors assume” and what do we do in portfolios as a result. We think that the coming decade will be a period where our investment approach, which prioritizes a focus on high-quality investments, will be rewarded.

We build portfolios that have complementary investments that play different roles. Together, they create a portfolio that is designed to preserve capital and then grow it. For instance, we look to public and private equity for growth and long-term inflation protection. In asset allocation conversations, we often emphasize having enough of an allocation to equities, and particularly high-quality equities that have pricing power, to protect against long-term inflation. Asset classes like private debt, distressed, and reinsurance are in the portfolio for their independent return and diversifying qualities. We will continue to be careful about increasing duration in fixed income portfolios. We will extend duration when the market compensates us for doing so, but we will err on the side of caution. You’ll hear many investors tactically moving to gold or commodities as inflation hedges, but the data is clear that these are tactical trades that if timed perfectly, can protect against short term unexpected inflation but barely maintain their value on a real – or inflation-adjusted - basis over longer time periods.

Q: Last year the S&P 500 Index had its worst year since 2008. Is it common for equities to decline like this? How are you advising clients in this type of environment?

That’s a great question. We have gone back and looked at historical performance since the S&P 500’s inception. Since 1928, we have had 95 calendar year returns and the S&P 500 has generated negative returns in 26 of those years, including 2022, or about 27% of the time. Following a negative calendar year, the S&P 500 generated a positive return 69% of the time. Of the 25 observations (excluding 2022) that the S&P 500 generated a negative return, the average return in the following year was 12%. Digging deeper, the S&P 500 realized consecutive years of negative returns only eight times. Five of those occurred between 1930-1932 (during the Great Depression) and 1940-1941 (World War II). The data suggest that it is uncommon for the S&P 500 to generate a negative return in any given year and even more uncommon across two consecutive years.

Past performance does not guarantee future results. 

  Negative Calendar Yr Return (%) Following Calendar Yr Return (%)
1929 -12% -28%
1930 -28% -47%
1931 -47% -15%
1932 -15% 44%
1934 -5% 41%
1937 -35% 31%
1939 0% -10%
1940 -10% -12%
1941 -12% 20%
1946 -8% 6%
1953 -1% 52%
1957 -11% 43%
1962 -9% 23%
1966 -10% 24%
1969 -8% 4%
1973 -15% -26%
1974 -26% 37%
1977 -7% 7%
1981 -5% 22%
1990 -3% 30%
2000 -9% -12%
2001 -12% -22%
2002 -22% 29%
2008 -37% 26%
2018 -4% 31%
2022 -18%  

During periods of market corrections, it can be tempting for investors to reduce equity exposure as the market is selling off. However, market timing is a flawed strategy, as investors tend to react by selling stocks after they have fallen in value, thereby locking in losses. We adhere to the adage that “it is about the time in the market, not timing the market” that allows investors to best position themselves for strong long-term results. Instead of trying to time the market by monitoring broad market, economic, or political indicators, investors should utilize a bottom-up, fundamental approach with a long-term horizon to select high-quality securities trading at discounts to intrinsic value.

Q: How about private investments? What can the addition of private equity do within a portfolio?

For those who can seek returns from private investments, we think they can be prudent additions to a well-constructed portfolio. Partnering with high quality investment managers may provide excess return potential and valuable diversification.

IRG compared the returns of a 65 equity/35 fixed income (“65/35”) portfolio1 to a 65/35 portfolio with 25% of the equity in private equity (“40/35/25 portfolio”2). The analysis shows that from 2000 to 2022, a blended 40/35/25 portfolio exposure generated a cumulative return of 319% vs. 179% or an annualized return of 6.5% vs. 4.6% for a 65/35 portfolio without privates. Assuming an investor invested $25 million on 12/31/1999 in each portfolio, the 65/35 portfolio would have grown to $69.8 million while the 40/35/25 portfolio would have grown to $104.7 million. A 40/35/25 portfolio also recovered faster to previous peak levels following a drawdown and exhibited less volatility, thus, generating higher risk-adjusted returns than a balanced portfolio consisting of equities and fixed income.

Past performance does not guarantee future results. 

Chart showing how private equity can help enhance long-term returns. The chart compared the returns of a 65 equity/35 fixed income (65/35) portfolio to a 65/35 portfolio with 25% of the equity in private equity ^^ (40/35/25 portfolio) from 1999 to 2022. The analysis shows that from 2000 to 2022, a blended 40/35/25 portfolio exposure generated a cumulative return of 319% vs. 179% or an annualized return of 6.5% vs. 4.6% for a 65/35 portfolio without privates. Assuming an investor invested $25 million on 12/31/1999 in each portfolio, the 65/35 portfolio would have grown to $69.8 million, while the 40/35/25 portfolio would have grown to $104.7 million. A 40/35/25 portfolio also recovered faster to previous peak levels following a drawdown and exhibited less volatility, thus, generating higher risk-adjusted returns than a balanced portfolio consisting of equities and fixed income. If you are in need of the data behind this chart, please contact

Q: A lot has been written about the collapse of Silicon Valley Bank, Signature Bank and First Republic, and the merger of Credit Suisse and UBS. What does this mean for the U.S. economy and which asset classes or industries will be the fallout of the banking crisis?

We believe that the regional bank crisis is going to be net negative for the U.S. economy over the medium term as the availability of lending into the real economy will be diminished. To put this into context, banks with less than $250 billion in assets account for roughly 50% of U.S. commercial and industrial lending, 60% of residential real estate lending, 70% to 80% of commercial real estate (“CRE”) lending, and 45% of consumer lending. These banks will now focus more on liquidity and as a result, tighten lending standards, which will be a deflationary force and one that comes at the expense of economic growth. The Fed actually highlighted these issues during the March 2023 FOMC meeting.

Across industries and asset classes, we believe there will be winners and losers as a result of the banking crisis. Given the aforementioned data, the commercial real estate sector will likely be negatively impacted given the importance of regional banks to CRE lending. Exacerbating this issue is the fact that office vacancy rates across the U.S. continue to rise, and high interest rates continue to wreak havoc on commercial property valuations. Borrowers with floating-rate mortgages face additional challenges in the form of increased monthly debt service, and owners with loans that come due in 2023 will have difficulty refinancing creating opportunities for liquidity providers.

Entrepreneurs will also likely suffer as Silicon Valley Bank was a banker for 50% of the technology and life science startups in the U.S. We expect venture deals to decline as venture funding, both equity and debt, will be costlier and scarcer. Older venture capital vintages have witnessed some valuation compression. This fact, combined with the decline in the availability of venture funding, leads us to think that venture capital firms that are actively deploying capital may be investing into what may be some of the most attractive vintage years in recent history.

In this environment, we also think distressed debt strategies will be interesting as they can provide liquidity as traditional banks shun financing and tighten lending conditions. We also think high-quality companies will be beneficiaries as they typically exhibit low leverage and have the ability to self-finance growth initiatives. These companies tend to have less interest rate sensitivity than other highly levered companies, and demand for their essential products and services may remain steady, despite macro headwinds. As always, IRG will be working hard to identify attractive investments for our clients and monitoring key risks across the portfolio.

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Market and Portfolio Update Q1 2023

BBH Private Banking Chief Investment Officer Suzanne Brenner and Deputy Chief Investment Officer Justin Reed review the markets and provide an update on our current portfolio positioning and priorities.

1 One basis point or bp is 1/100th of a percent (0.01% or 0.0001).

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Investors should be able to withstand short-term fluctuations in the equity markets and fixed income markets in return for potentially higher returns over the long term. The value of portfolios changes every day and can be affected by changes in interest rates, general market conditions and other political, social and economic developments.

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