May 2023 Portfolio Update

May 4, 2023 —

This month, we are changing how we share our research with readers and clients. We will try to keep the present piece short and simply provide updates and rationales for our portfolio decisions. Our more in-depth research will be featured on our Substack site. We wrote two such pieces in April:

  • In the first, we examine the benefits and drawbacks of international diversification.
  • In the second, we argue that recessions are not always bad for stocks, and are often quite good.

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Our Portfolio

As we wrote in another Substack piece a few weeks ago, the failure of  Silicon Valley Bank represented a regime shift in markets.

  • First, the Fed’s interest rate hiking cycle is hurting the profitability of the U.S. banking system (and in some cases, also impacting the solvency of regional banks).
  • Second, banks — which are losing depositors to more attractive alternatives, like money market funds or Treasury bills — are being forced to either scale down their balance sheets, pay higher deposit rates, or both.
  • This is hurting bank profitability and causing banks to decrease credit provision to the economy. The most deeply impacted economic sector is commercial real estate (CRE), which was already reeling from the work-from-home trend that took root post COVID.
  • Fortunately, this cycle is likely to be self-correcting because as economic growth and inflation slow on the back of these dynamics, interest rates will fall, which will undo the damage higher rates have inflicted on the banking system.
  • In the meantime, the likely beneficiaries of these trends are fixed income securities, especially ones with little to no credit risk, as well as growth stocks with long-dated cash flows.
  • Add to this the revolutionary changes that AI will bring to the economy, and tech stocks — not credit sensitive, no real estate exposure, long-dated cash flows, good earnings prospects — seem attractive despite already-high valuations.
  • For a much more detailed analysis of the impact of Fed policy on markets and the economy, please see our piece on Seeking Alpha.

We have positioned QuantStreet’s portfolio to reflect these themes in the context of our usual quant-driven asset allocation framework.

If you want to learn more about our performance, discuss a financial plan, or have any other questions, we’d love to hear from you. Please reach out.

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