The S&P Kensho New Economy Indices seek to track the industries and innovation of the Fourth Industrial Revolution
U.S. equities posted positive returns across the market cap spectrum in Q1 2023, with the S&P Composite 1500® up 7.2%. The rise, however, was bumpy as investors navigated the banking-related crunch and its aftermath, with the biggest U.S. bank default since 2008, which also briefly spread to Europe. A pattern of reversals from last year was well underway during the first two months of the quarter, when Communication Services and Consumer Discretionary were the top performers within the S&P 500®, while the Energy and Health Care sectors were the laggards. After the U.S. banking hiccup in March, the Financials sector (-5.6%) became the biggest quarterly underperformer, while Information Technology (up 22%) and Communication Services (up 20.5%) took the top spots. Recent returns of the Financials sector have diverged materially from their pattern of moving closely with the 10-year Treasury yields. Weakness in U.S. regional banks also flowed through into the underperformance of the U.S. small-cap space, reflected in the sharp fall in the S&P SmallCap 600 versus S&P 500 Information Technology performance in March. Secular growth outperformance and defensive sectors’ underperformance was in line with the performance of S&P 500 factors—high beta and growth took the top spots, while high dividend, pure value and low volatility were near the bottom of the table. Of the 25 Kensho subsectors, 22 were higher this quarter, the first time since the highs posted in Q1 2021. Most non-U.S. equity markets were also up this quarter—eurozone equities (up 10.5%) markedly outperformed U.S. equities, while emerging market equities posted relatively modest gains (up 2.3%).
The U.S. Fed’s tightening path was well anticipated by the markets at the beginning of the year, with expectations for the terminal overnight rate at one point hitting nearly 5.7%. Continued pressure from sustained inflation and overall labor market strength were weighing on the Fed, until the crisis from Silicon Valley Bank (SVB) erupted. As the contagion spread, the rates market immediately repriced the Fed rate hike path lower for the year. U.S. Treasuries attracted significant inflows this quarter and posted one the best quarterly returns (3%) in nearly three years. However, tighter financial conditions in the aftermath of the SVB collapse have seen high yield, and other higher risk segments of the debt markets show weakness. The U.K. and European Central Banks stayed on course with the U.S. in terms of rate hikes during Q1. The U.S. dollar, nonetheless, weakened across most of its heavily traded crosses this quarter, as expectations around a pause in the Fed’s rate hikes increased. Gold also benefited from the rate repricing and bank credit concerns, surging above USD 2,000 to near-historic levels. Oil prices stabilized this quarter after a downtrend over the previous two quarters, but it started to move higher after OPEC announced surprise oil cuts at the start of April. Elevated U.S. sovereign CDS spreads continue to reflect the market unease around a potential deal before hitting the U.S. government debt ceiling X date sometime in the second half of the year.
Top Three from across the New Economies
Distributed Ledger (66.7%): KLEDGER posted its best quarterly performance since its inception in late 2018, climbing back up to September2022 levels. Unsurprisingly, this quarter’s gains closely tracked the rise in the price of Bitcoin (up 71%). The U.S. regional banking crisis around mid-March prompted renewed interest in currency alternatives like crypto and gold assets. Almost all of the index constituents posted positive quarterly returns with the exceptions of Turkish firm Turkcell (-10%) and Financials firm ING Groep (-2%). 5 of the 12 constituents, primarily involved with the crypto mining space, posted triple-digit quarterly returns, with the top spots taken by Riot Platforms (up 195%) and Marathon Digital (up 156%). The index continues to be dominated by the Application Software sub-industry (up 55%), followed by Financials sector firms (up 30%). It also remains the most volatile across the Kensho subsectors due to a high beta to the crypto markets from its exposure to crypto mining companies.
Virtual Reality (27.2%): KVR’s best quarterly performance in two years was supported by positive contributions from nearly all of its constituents (17 out of 19). The Semiconductors industry played an integral part in KVR’s recovery this quarter as the index neared its one-year peak. NVIDIA was the top performer within the index (up 90%), doubling its price over the six-month period and becoming the best YTD performer among the S&P 500 constituents. Investor sentiment toward NVIDIA likely took a hit from the downturn in crypto assets in 2022, but there has been widespread optimism around the company’s recent push toward creating products geared toward AI applications. Meta, the second-best YTD performer (up 76%) within the S&P 500, was another top contributor to KVR’s performance. Meta has also been on a comeback track, returning closer to its one-year peak on the back of strong Q4 2022 earnings reports and a focus on further incorporating AI-powered tools within their apps. Faro was the notable underperformer (-16%) within KVR, as it slid close to its lowest level in over five years. This imaging devices and computer-aided measurement firm posted lackluster Q2 2022 results and has been on a downward trend since reaching its peak in early 2021.