2023 Mid-Year Commentary

5 Things to know about the Market at mid-year:

  1. The S&P is up over 13% midway through the year after being down 20% in 2022.  We believe the market is forward pricing, not backward looking, so expectations are improved.
  2. Inflation has improved, and there will be a lag of how this quick rate rise will ultimately play out. However, this is a well expected pause for the Fed on raises.
  3. Recession fears are tough to agree with given the strong labor market and consumer strength.  AI (artificial intelligence) is all the big buzz.  We anticipate this as a positive for the job market, not as a damper.
  4. There is still a ton of cash on the sidelines and the consumer has buying power.
  5. China and Russia are concerns, but geopolitics will forever be a concern as long as there is an economic race to win.  We must play the game knowing that rule.

Our industry tends to create optimists (bulls) or pessimists (bears).  Both are looking for opportunity in one direction or the other. The bulls are more often right, as we have more up markets then down.  However, when we have a down year, like 2022, the bears can make a lot of noise.  As we always say, fear sells, so if you want to stay engaged with fear, keep watching cable news.  However, it is tough to contend with the fact that this year is off to a tremendous start as we close in on halftime.  The S&P 500 is up over 13% as we write this, inflation is coming down, and all of this is in the face of bank failures, debt ceilings, and recession fears. 

While sometimes people confuse the market for a reflection of how the economy is doing, it is really a reflection on the expectations of investors.  At the beginning of the year, investors expected the economy to be in deep recession by now, and that did not come to fruition.  Everyone got a bit too pessimistic, and the rally has been the product of those investors being forced to revise their pessimism to a more optimistic view.

We may still have a recession later this year, but the rally has helped shift eyes from worrying about lower lows to thinking we might see higher highs.  This is part of the reason we continue to be optimistic about the market looking forward.  Many investors looked at cash yielding over 4.5% at the end of last year and felt that was the best place to be.  Of course, fear and greed play a powerful role in the direction of the market, and right now a lot of professional investors are fearful that the market will hit higher levels and they will be left out as they sit in cash. 

We were not as tempted as others to shift into high yielding money markets last year.  We saw too much opportunity in investments that had much better long term return prospects.  We felt strongly that large, cash generating technology stocks had been unfairly punished by inflation concerns, and we now see those stocks leading the market higher with a focus on cost reduction and exciting innovations in many areas such as artificial intelligence.

We also saw fixed income investments that offered returns in excess of 10%, and we have high confidence that they will pay their yields and return their principal.  We remember people asking about money market rates and suggesting that as a safe haven, and our general response was “why earn 4.5% if we can earn more than twice that?”  While cash always has its place in people’s portfolios and balance sheets, it is our job to find better investments than money market funds. That dedication to finding better investments with significantly higher interest rates and short durations has had a tremendous positive impact on client portfolios.

As we look forward, we actually expect much of the same:

  • Inflation to continue to come down
  • The labor market to stay strong
  • Companies to continue to exceed analyst estimates for earnings
  • The Fed to continue to not know what year or place they are in

One important difference for markets now versus the last 15 years is that the Federal Reserve’s interest rates are now relatively high.  Since the financial crisis, the only stimulative measure the Fed could take was quantitative easing, or QE, since interest rates were at zero.  Now that interest rates are over 5%, should the economy faulter, the Fed has plenty of room to cut interest rates, helping to slow any declines in stocks and give a boost to bonds.

So, what could go wrong?  While we still think there are potential cracks in the banking system and commercial real estate, we feel most of those risks have plenty of focus and should be able to be managed without causing a crisis.  The real thing that goes bump in the night for us is concern over the relationship of China and the West.  This will certainly add some volatility to markets, and this should remind everyone that a disciplined process is key in an environment with so many unknowns.

But worry not, it is our job to stay up late contemplating all the risks in the world, to your investments, and your overall financial plan.  If you have questions, we want to hear them.  As always, we will continue to send updates both on a mass level like this note and a personal level to those we work with and help invest for. 

In the meantime, enjoy your summer, and congratulations to all the graduates this year!

Bobby, Jordan, and the Green Ridge Wealth Planning Team

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