After a difficult year last year, most major asset classes have rebounded and are performing well in 2023. The S&P 500 entered a new bull market, which is an increase of over 20% from a bear market low. As for fixed income, the US bond market declined in the 2nd quarter but it is still in positive territory for the year. Our Q2' 2023 Market Review and Outlook goes into greater detail and highlights our short- and long-term outlook going forward.
At Winthrop Wealth, we follow a Total Net Worth Approach to wealth management that combines both comprehensive financial planning and investment management. The financial plan helps define cash flow needs, seeks to optimize account structures, considers tax mitigation strategies, and determines the appropriate asset allocation based on the client’s willingness and ability to take risk. Based on the output of the financial plan, our investment management process designs a well-diversified portfolio constructed with a long-term methodology based on prudent risk management, asset allocation, and security selection. No strategy assures success or protects against loss. Investing involves risk, including loss of principle.
Second Quarter 2023 Highlights
» US Equity Markets: The market rally continued in the second quarter as the S&P 500 increased by +8.7% in the period. After gaining +7.5% in the first quarter, the index is now higher by +16.9% in 2023 for the second-best overall start to a calendar year in the last twenty-five years. The S&P 500 officially entered a new bull market in the quarter, which is an increase of +20% from a bear market low. Since the bear market bottom (10/12/22), the S&P is higher by about +25.9%.
» US Fixed Income Markets: The Bloomberg Barclays US Aggregate Bond index (Agg), which acts as a proxy for the investment-grade bond market, decreased by -0.8% in the second quarter as the 10-Year Treasury yield increased from 3.47% to 3.84% in the period (bond prices move inversely to interest rates and credit spreads). The bond market is now higher by +2.1% in 2023. The yield to maturity on the US Aggregate Bond index was 4.8% at the end of the quarter, which is the highest level since 2008.
» Treasury Yields: The Treasury yield curve is still inverted with both the 3-Month (5.28%) and 2-Year (4.90%) higher than the 10-Year (3.84%) yield. In general, the Fed influences shorter term Treasury yields by setting the target federal funds rate while the market controls long term rates as investor demand will vary based on future expectations of inflation and economic growth. An inverted yield curve is a sign of a pessimistic economic outlook and typically signals that investors expect the Fed to cut rates soon.
» Inflation: Most inflation readings have decelerated from peak levels with several indicators returning to normalized ranges. Meaningful evidence of disinflation exists in Producer Price Inflation, breakeven rates, ISM Prices Paid data, supply chain indicators, and commodity prices. While the Fed acknowledges overall progress, they are not pleased with the pace of disinflation in the services sector as measured by the Core Personal Consumption Expenditure (PCE) Index. The latest Core PCE Inflation reading of +4.6% is still well above the Fed’s 2.0% target.
» The Fed: The FOMC raised the federal funds rate 25 basis points (0.25%) at their May meeting before pausing rate hikes in June. The top end of the federal funds rate now stands at 5.25%. Since March of 2022, the Fed has increased interest rates by 5% total for one of the quickest tightening cycles in United States history. The FOMC’s most recent Summary of Economic Projections (SEP) showed that the median participant still expects two more rate hikes this year.
» US Economy: The United States economy continues to meander along and send mixed signals about its future path. Manufacturing data, economic indicators, consumer spending, and the housing market have all weakened and exhibited signs of a recession. It’s not hard to see signs of a recession in several areas. Meanwhile, the strength of the economy currently lies with the labor market. Real GDP Growth is estimated at +1.3% in 2023 and +0.8% in 2024.
» United Stated Recessions and S&P 500 Performance: Despite weakening over the last eighteen months, the United States economy has been able to avoid a recession thus far, surprising many observers, including us. According to the Federal Reserve, the possibility of a recession sometime this year is “plausible.” A lot of short-term predictions about the market or the economy are just noise. As such, we focus on the fact that recessions can create buying opportunities for long-term investors. During the last 15 recessions, the S&P 500 declined by an average of -30.0%. However, once the market bottomed, performance was very strong over subsequent 1-YR (+50.1%), 3-YR (+79.0%), and 5-YR (+142.1%) periods. Past performance is no guarantee of future results.
» Market Outlook: We are turning cautious in the near term as the S&P 500, currently at 4,450, recently broke out of its 14-month trading range of 3,600 to 4,300. In our opinion, the fundamentals of the stock market do not warrant a recovery back to all-time highs yet. A key tenant to our investment philosophy is to maintain a long-term viewpoint as markets can be incredibly volatile over short-time periods. Markets have historically increased over time as successful corporations have been able to figure out ways to generate profits through advances in innovation and productivity. In our view, investors with a globally diversified portfolio and a long-term horizon should remain optimistic. Historically, equity markets have recovered from recessions and downturns; however, past performance is no guarantee of future returns. It is important to consider your own risk tolerance, financial circumstances, and time horizon when investing.
Please see some of our most recent market commentaries:
The market rally continued in the second quarter as the S&P 500 increased by +8.7% in the period. After gaining +7.5% in the first quarter, the index is now higher by +16.9% in 2023 for the second-best overall start to a calendar year in the last twenty-five years. The S&P 500 officially entered a new bull market in the quarter, which is an increase of +20% from a bear market low. With hindsight the latest bear market officially lasted from January 3rd, 2022, to October 12th, 2022, with a total decline of -24.5%. Since the bear market bottom (10/12/22), the S&P is higher by about +25.9% and is about -4.9% below the all-time high.
We constantly remind our clients to maintain a long-term viewpoint as markets can be incredibly volatile over the short-term. The stock market has historically gone up over time, but returns are not linear. Since 1928, the S&P 500 has generated a total annualized return of +9.5% despite an average peak-to-trough decline of -15% at some point each year. Market performance over the last eighteen months reinforces our belief in a long-term viewpoint. As noted in our S&P 500 Bear Markets chart, historically challenging environments have created strong buying opportunities for long-term investors. Historically, equity markets have recovered from recessions and downturns; however, past performance is no guarantee of future returns. It is important to consider your own risk tolerance, financial circumstances, and time horizon when investing.
The market rally since October was driven by evidence of disinflation, the economy, labor market, and corporate earnings holding up better than expected, and the perceived benefit that artificial intelligence (AI) will have on profits and productivity. The S&P 500 increase has been narrow this year, which means only a handful of stocks are responsible for the overall performance of the index. The top seven companies in the S&P 500, which are mainly considered growth stocks, have performed exceptionally well, including Apple: (+49.7%), Microsoft (+42.7%), Alphabet (+36%), Amazon (+55.2%), Nvidia (+189.5%), Tesla (+112.5%), and Meta (+138.5%). About 20% of S&P 500 stocks are negative for the year with only about 30% outperforming the index. Although a narrow market will frustrate some underperforming portfolio managers who didn’t own enough of the abovementioned stocks, we see little evidence that this type of environment has any predictive power for future returns. Past performance is never a guarantee of future results.
• Market Cap: Large Caps (S&P 500: +8.7%) outperformed Small (Russell 2000: +5.2%) and Mid (S&P 400: +4.8%). • Style: Growth (Russell 1000 Growth: +12.8%) exceeded Value (Russell 1000 Value: +4.1%). • Sector: The market reversal continued in the second quarter with last year’s sector laggards becoming the leaders and vice versa. The three worst performing sectors of 2022 are now the top performers and were all up by double-digits in the quarter: Technology (17.2%), Consumer Discretionary (14.6%), and Communication Services (13.1%). Meanwhile, the two best performing sectors in 2022 finished as the two worst: Energy (-0.9%) and Utilities (-2.5%). The market often undergoes these violent rotations that can make an under-diversified investor feel like a genius one day and a fool the next. Rather than make risky concentrated bets, we prefer to construct diversified portfolios across regions, countries, market caps, factors, styles, sectors, and industries and tilt toward the areas we feel provide the most potential benefit. Asset allocation and diversification do not ensure a profit, protect against loss, or against market risk. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
US FIXED INCOME MARKETS
The Bloomberg Barclays US Aggregate Bond index (Agg), which acts as a proxy for the investment-grade bond market, decreased by -0.8% in the second quarter as the 10-Year Treasury yield increased from 3.47% to 3.84% in the period (bond prices move inversely to interest rates and credit spreads). The bond market is now higher by +2.1% in 2023 and it is still trying to find its footing after coming off the worst calendar year (2022: -13%) since inception of the index in 1976. Please see our Client Question: Bond Primer where we detail bond mechanics, characteristics, types, risks, and historical returns.
Our objective with fixed income is to provide ballast, stability, and income to portfolios. Ballast means that, ideally, the fixed income holdings are increasing when equity markets are declining. Bonds did not provide ballast for most of 2022 as interest rates rapidly increased during the first half of the year. We have continuously stated that we expect the negative correlation between stocks and bonds to return in the future once yields level out and that all else equal the fixed income markets need yields to stabilize rather than decrease to achieve positive returns. We will also point out that the bond market’s return has been positive over the previous year. From June 15, 2022 through the end of the quarter, the 10-Year Treasury yield increased from 3.47% to 3.84%, the exact same increase as in the last quarter (+37 basis points). Yet the Agg’s return from 6/15/22 to 6/30/23 was +1.7%, while the index declined by -0.8% in the second quarter. The contrast in return is due to the differences in coupon payments and price appreciation toward par value over the two periods. In other words, increases in interest rates are less impactful to bond returns over longer periods because bondholders continue to receive coupon (interest) payments while a bond’s price will converge toward par as it gets closer to maturity, assuming no defaults. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise.
The Treasury yield curve is still inverted with both the 3-Month (5.28%) and 2-Year (4.90%) higher than the 10-Year (3.84%) yield. In general, the Fed influences shorter term Treasury yields by setting the target federal funds rate while the market controls long term rates as investor demand will vary based on future expectations of inflation and economic growth. An inverted yield curve is a sign of a pessimistic economic outlook and typically signals that investors expect the Fed to cut rates soon. If the Fed does cut rates as investors expect, the 3-Month and 2-Year yields will fall below the 10-Year and the yield curve will be upward sloping again. Please see our Client Question: Yield Curve Inversion.
Yield to Maturity
The yield to maturities of various bond indices are still at their highest levels in years. Yield to maturity is defined as the estimated annualized rate of return an investor can expect on a bond if purchased today and held to maturity, assuming the issuer makes all their interest and principal payments (i.e., no defaults). The yield to maturity on the US Aggregate Bond index was 4.8% at the end of the quarter, which is the highest level since 2008. In other words, future returns from the Agg bond index have not been this attractive in nearly 15 years. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Inflation
The increase in inflation since early-2021 was driven by supply chain bottlenecks, surging energy prices, strong consumer demand caused by a solid labor market, and massive amounts of stimulus. Most inflation readings have decelerated from peak levels with several indicators returning to normalized ranges. Meaningful evidence of disinflation exists in Producer Price Inflation, breakeven rates, ISM Prices Paid data, supply chain indicators, and commodity prices. While the Fed acknowledges overall progress, they are not pleased with the pace of disinflation in the services sector as measured by the Core Personal Consumption Expenditure (PCE) Index. The latest Core PCE Inflation reading of +4.6% is still well above the Fed’s 2.0% target.
The Fed has divided inflation into three buckets: goods (decelerating as supply chains normalize), housing (decelerating under rising mortgage rates but not showing up in inflation data until mid-2023), and non-housing related core services (still elevated due to the strong labor market and robust wage growth). The Fed theorizes the best way to decrease services inflation is to lower demand by weakening the labor market.
The Fed’s latest Summary of Economic Projections show the median participant expects Core PCE Inflation to fall to 3.9% in 2023, 2.6% in 2024, and 2.2% in 2025. Note that the Fed still shows inflation above their 2% target by the end of 2025.
Here are several key inflation indicators and a chart tracking the data since the start of 2020:
• The Bureau of Labor Statistics Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The index includes food and energy prices.
o Latest Reading: 4.0% (May). Peak: 9.1% (June 2022).
• The Core Personal Consumption Expenditure (PCE) Index measures the prices paid by consumers for goods and services based on surveys of what businesses are selling. Core means that the index excludes food and energy prices. This is the Fed’s preferred inflation measure, which they target at an average of 2%.
o Latest Reading: 4.6% (May). Peak: 5.4% (February 2022).
• The Core Producer Price Index (PPI) measures the average change in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services.
o Latest Reading: 2.8% (May). Peak: 9.7% (March 2022).
• The Bureau of Labor Statistics Average Hourly Earnings tracks total hourly renumeration (in cash or in kind) paid to employees in return for work done (or paid leave). Data is from the Current Employment Statistics (CES) survey.
o Latest Reading: 4.3% (May). Peak: 8.1% (April 2020).
• The University of Michigan Inflation Expectations data is based on a monthly survey designed to gauge consumer expectations. Participants are asked for their view on annual inflation over the next 5 to 10 years.
o Latest Reading: 3.0% (June). Peak: 3.1% (January 2022).
Source: Bloomberg
The Fed
The Federal Reserve serves as the central bank of the United States and performs key functions designed to promote the health of the economy and stability of the financial system. The three key entities include the Board of Governors, twelve Federal Reserve Banks, and the Federal Open Market Committee (FOMC). The FOMC sets monetary policy in accordance with its mandate from Congress: to promote maximum employment, stable prices, and moderate long-term interest rates. According to the Fed, “monetary policy directly affects interest rates; it indirectly affects stock prices, wealth, and currency exchange rates. Through these channels, monetary policy influences spending, investment, production, employment, and inflation in the United States.” Please see our Client Question on The Fed which details the key entities, and the impact monetary policy has on the economy, interest rates, and stock prices.
Interest Rates: The FOMC raised the federal funds rate 25 basis points (0.25%) at their May meeting before pausing rate hikes in June. The top end of the federal funds rate now stands at 5.25%. Since March of 2022, the Fed has increased interest rates by 5% total for one of the quickest tightening cycles in United States history. The FOMC’s most recent Summary of Economic Projections (SEP) showed that the median participant expects two more rate hikes this year and for the federal funds rate to peak at 5.6% in 2023 before they cut rates to 4.6% in 2024. The market is currently pricing in about a 75% chance that the Fed will raise rates by another 25 basis points at the July 26th meeting.
Balance Sheet – Quantitative Tightening: The Fed is also reducing the size of their nearly $9 trillion balance sheet. The runoff plan is for monthly caps of about $60 billion for Treasuries and $35 billion for agency mortgage-backed securities. The monthly reduction of about $95 billion is larger than the $50 billion per month pace that was used during the 2017-2019 runoff plan. At the current runoff rate, it will take over 4 years for the Fed’s balance sheet to decrease to its pre-pandemic size.
At their latest meeting, the Fed raised their 2023 forecasts for both economic growth (Real GDP) and inflation (Core PCE inflation). The Fed seems genuinely surprised at the strength of the economy despite several bank failures earlier this year. An old investment adage is that the Fed raises interest rates until something breaks. As several banks “broke” in March, the FOMC forecasted that rate hikes would stop once the federal funds rate reached 5.1%. Now only a few months later, things have calmed in the banking sector and the economy is performing better than expected.
Fed Chair Powell recently stated that, “the process of getting inflation back down to 2 percent has a long way to go and nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year.” The Fed’s view seems to be, “if the economy is still performing well and Core PCE Inflation remains elevated, why not raise rates again?” With this framework, the Fed back to forecasting a peak federal funds rate of 5.6%, which assumes two more 25 basis point rate hikes. In our opinion, the best way to forecast the Fed’s future actions is to focus on Core PCE inflation. If that reading stays elevated, more rate hikes are on the table. On the other hand, if Core PCE inflation decelerates, the Fed will likely hold off on further rate hikes. Since there is only one more PCE Inflation reading between now and the next FOMC meeting on July 26th, we expect another rate hike at that time given the bias toward further tightening. We’re somewhat confused at the Fed’s recent actions to pause in June only to suggest another rate hike in July and potentially another before year end. However, as the past several years have demonstrated, Fed forecasts are only a snapshot in time and they can change quickly.
Source: Bloomberg
US ECONOMY
The United States economy continues to meander along and send mixed signals about its future path. After increasing by +2.1% in 2022, Real GDP Growth is estimated at +1.3% in 2023 and +0.8% in 2024. Manufacturing data, economic indicators, consumer spending, and the housing market have all weakened while inflation has decelerated but is still above the Fed’s 2% target. It’s not hard to see signs of a recession in several areas.
Meanwhile, the strength of the economy currently lies with the labor market as the unemployment rate of 3.7% is close to a 50-year low. The service sector, including retail, leisure and hospitality, and health care, continues to add employees and search for new workers. With the Fed actively trying to soften the labor market to bring down inflation by lowering the overall demand for goods and services, we expect the unemployment rate to tick up over the rest of the year. Admittedly, we’ve expected the unemployment rate to increase for several months and have been pleasantly surprised at the resiliency of the labor market to this point.
While the economy has slowed considerably since 2021, it has still been able to avoid the technical definition of a recession for now. As the labor market continues to exceed expectations, the forecasts for the start of a recession keep getting pushed back by a few months. In our view, the economy can potentially avoid a recession if inflation continues to decelerate, which would allow the Fed to stop their tightening cycle before higher interest rates eventually lead to cracks in the jobs market. Please click here or see below for our thoughts on a potential US recession.
Source: Winthrop Wealth, Bloomberg
Source: Bloomberg
United Stated Recessions and S&P 500
The National Bureau of Economic Research (NBER) Business Cycle Dating Committee is charged with maintaining official records of expansions and recessions in the United States. The NBER defines a recession as a significant decline in economic activity while an expansion is defined as a period where economic activity rises substantially. According to the NBER, since 1929 there have been 15 recessions in the US lasting an average of 13 months each.
Despite weakening over the last eighteen months, the United States economy has been able to avoid a recession thus far, surprising many observers, including us. We started writing that a mild US recession felt inevitable last summer, and we have been pleased thus far at the resiliency of the labor market, which has kept the economy in expansion territory. Several recessionary indicators are still flashing yellow or red, including the yield curve, leading economic indicators, and the ISM Manufacturing survey. According to the Federal Reserve, the possibility of a recession sometime this year is “plausible.” While the economy may still fall into a recession, we continue to believe that the contraction would be far less severe than previous significant economic declines like the Global Financial Crisis of 2007 – 2009 as consumer leverage and balance sheets are in far better condition.
An over-simplified business cycle historically followed a similar pattern: the economy expands rapidly – unemployment falls – inflation overheats – financial bubbles forms – the Fed responds by raising interest rates – credit tightens – good borrowers struggle to find loans – the economy stumbles – a recession occurs – the economy bottoms – repeat. We’ve seen the first stages of the business cycle play out starting in mid-2020. At this point, it is unclear whether the turbulence that started with Silicon Valley Bank will lead to a full-blown credit crunch, but we do expect that banks will tighten their lending standards and face stricter regulations, which will lead to slower overall economic growth and increased odds of an official recession.
The good news for long-term investors is that the S&P 500 already priced in an average recession last year when the index fell by -24.5% from January 3rd through October 12th. We are not sure if October 12th marks the ultimate bottom for this period, although unless your view is that this is the start of another Great Depression or Financial Crisis, then a lot of the damage in the equity market may have already occurred at the recent low.
A key tenant to our investment philosophy is to maintain a long-term viewpoint. A lot of short-term predictions about the market or the economy are just noise. As such, we focus on the fact that recessions can create buying opportunities for long-term investors. During the last 15 recessions, the S&P 500 declined by an average of -30.0%. However, once the market bottomed, performance was very strong over subsequent 1-YR (+50.1%), 3-YR (+79.0%), and 5-YR (+142.1%) periods. Historically, equity markets have recovered from recessions and downturns; however, past performance is no guarantee of future returns. It is important to consider your own risk. tolerance, financial circumstances, and time horizon when investing.
Source: National Bureau of Economic Research (NBER) and Bloomberg
OUTLOOK
Our market outlook is based on four pillars: Monetary Policy, Economic Growth, Corporate Earnings, and Valuation.
The market rally since October was driven by evidence of disinflation, the economy, labor market, and corporate earnings holding up better than expected, and the perceived benefit that artificial intelligence (AI) will have on profits and productivity. Despite the strong performance over the past several months, significant market and economic risks remain. We continue to separate our outlook into short- (months) and long-term (years) periods.
Short-Term: We are turning cautious in the near term as the S&P 500, currently at 4,450, recently broke out of its 14-month trading range of 3,600 to 4,300. In our opinion, the fundamentals of the stock market do not warrant a recovery back to all-time highs yet. Valuations are stretched, especially given current interest rate levels (Client Question: Why do Interest Rates Impact Stock Prices?). While earnings have come in better than expected, they would face downside risk if the economy began to stumble. Furthermore, while the Fed is likely close to ending their tightening cycle, services inflation remains sticky, which may cause the FOMC to continue raising rates. Adding it all up, we would expect some consolidation after the strong year-to-date performance with a move back down into the upper end of the recent trading range as a probable outcome. The S&P 500 is on pace to increase by nearly +37% in 2023, which seems unlikely in our view. A digestion period is healthy for the market’s long-term potential as market booms are typically followed by busts (the S&P 500 performance from 2021 through 2022 is the latest example). If the market were to break toward the bottom end of its trading range, our short-term view would turn more positive, and we would look to add to equities in actively managed portfolios. If the S&P were to keep increasing toward all-time highs, our short-term view would turn increasingly cautious, and we would begin trimming equities. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Long-Term: A key tenant to our investment philosophy is to maintain a long-term viewpoint as markets can be incredibly volatile over short-time periods. As the market sold off last year, we reminded clients that difficult periods create opportunities for long-term investors. While market weakness may return, staying invested or adding to existing holdings throughout 2022 looks like a great decision right now. Markets have historically increased over time as successful corporations have been able to figure out ways to generate profits through advances in innovation and productivity. In our view, investors with a globally diversified portfolio and a long-term horizon should remain optimistic. We continue to believe in the value of time, diversification, and the power of compounding. Historically, equity markets have recovered from recessions and downturns; however, past performance is no guarantee of future returns. It is important to consider your own risk tolerance, financial circumstances, and time horizon.
We will continue to rely on our time-tested process while looking for opportunities to tax loss harvest, reposition and rebalance portfolios, and selectively put money to work for clients that have recently made contributions to their accounts. On the equity side, we remain tilted toward high quality US stocks. On the fixed income side, we are taking advantage of the highest yields in over a decade while continuing to focus on achieving ballast, stability, and income as well as accounting for short-term cash needs. There is no guarantee a diversified portfolio will outperform a non-diversified portfolio and all investing involves risk including loss of principal.
SECOND QUARTER 2023 MARKET RETURNS
Source: Bloomberg
DISCLOSURES
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All indexes mentioned are unmanaged indexes which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The S&P Midcap 400 Stock Index is an unmanaged index generally representative of the market for the stocks of mid-sized US companies.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
The Russell 3000 Growth Index is an unmanaged index comprised of those Russell 3000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 3000 Value Index measures the performance of those Russell 3000 companies with lower price-to-book ratios and lower forecasted growth values.
The prices of small cap stocks and mid cap stocks are generally more volatile than large cap stocks. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece,
Hungary, Poland, Qatar, Russia, South Africa. Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.
The MSCI US Broad Market Index captures broad US equity coverage. The index includes 3,204 constituents across large, mid, small and micro capitalizations, representing about 99% of the US equity universe.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
The Barclays Capital US Corporate High Yield Bond index is an index representative of the universe of fixed-rate, non-investment grade debt.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.
The Bloomberg Barclays US Treasury Bills 1-3 Month Index is designed to measure the performance of public obligations of the U.S.
Treasury that have a remaining maturity of greater than or equal to 1 month and less than 3 months. The Index includes all publicly issued zero coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and at least 1 month, are rated investment grade, and have $300 million or more of outstanding face value.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply.
High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
Financial planning is a tool intended to review your current financial situation, investment objectives and goals, and suggest potential planning ideas and concepts that may be of benefit. There is no guarantee that financial planning will help you reach your goals.
Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
Diversification does not protect against market risk. All investing involves risk which you should be prepared to bear.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Winthrop Wealth, a Registered Investment Advisor and separate entity from LPL Financial.
< COMMENTARY
Market Commentary | July 06, 2023
Q2’2023 Market Review and Outlook
By Andrew Murphy, CFA
Co-Chief Investment Officer
After a difficult year last year, most major asset classes have rebounded and are performing well in 2023. The S&P 500 entered a new bull market, which is an increase of over 20% from a bear market low. As for fixed income, the US bond market declined in the 2nd quarter but it is still in positive territory for the year. Our Q2' 2023 Market Review and Outlook goes into greater detail and highlights our short- and long-term outlook going forward.
At Winthrop Wealth, we follow a Total Net Worth Approach to wealth management that combines both comprehensive financial planning and investment management. The financial plan helps define cash flow needs, seeks to optimize account structures, considers tax mitigation strategies, and determines the appropriate asset allocation based on the client’s willingness and ability to take risk. Based on the output of the financial plan, our investment management process designs a well-diversified portfolio constructed with a long-term methodology based on prudent risk management, asset allocation, and security selection. No strategy assures success or protects against loss. Investing involves risk, including loss of principle.
Second Quarter 2023 Highlights
» US Equity Markets: The market rally continued in the second quarter as the S&P 500 increased by +8.7% in the period. After gaining +7.5% in the first quarter, the index is now higher by +16.9% in 2023 for the second-best overall start to a calendar year in the last twenty-five years. The S&P 500 officially entered a new bull market in the quarter, which is an increase of +20% from a bear market low. Since the bear market bottom (10/12/22), the S&P is higher by about +25.9%.
» US Fixed Income Markets: The Bloomberg Barclays US Aggregate Bond index (Agg), which acts as a proxy for the investment-grade bond market, decreased by -0.8% in the second quarter as the 10-Year Treasury yield increased from 3.47% to 3.84% in the period (bond prices move inversely to interest rates and credit spreads). The bond market is now higher by +2.1% in 2023. The yield to maturity on the US Aggregate Bond index was 4.8% at the end of the quarter, which is the highest level since 2008.
» Treasury Yields: The Treasury yield curve is still inverted with both the 3-Month (5.28%) and 2-Year (4.90%) higher than the 10-Year (3.84%) yield. In general, the Fed influences shorter term Treasury yields by setting the target federal funds rate while the market controls long term rates as investor demand will vary based on future expectations of inflation and economic growth. An inverted yield curve is a sign of a pessimistic economic outlook and typically signals that investors expect the Fed to cut rates soon.
» Inflation: Most inflation readings have decelerated from peak levels with several indicators returning to normalized ranges. Meaningful evidence of disinflation exists in Producer Price Inflation, breakeven rates, ISM Prices Paid data, supply chain indicators, and commodity prices. While the Fed acknowledges overall progress, they are not pleased with the pace of disinflation in the services sector as measured by the Core Personal Consumption Expenditure (PCE) Index. The latest Core PCE Inflation reading of +4.6% is still well above the Fed’s 2.0% target.
» The Fed: The FOMC raised the federal funds rate 25 basis points (0.25%) at their May meeting before pausing rate hikes in June. The top end of the federal funds rate now stands at 5.25%. Since March of 2022, the Fed has increased interest rates by 5% total for one of the quickest tightening cycles in United States history. The FOMC’s most recent Summary of Economic Projections (SEP) showed that the median participant still expects two more rate hikes this year.
» US Economy: The United States economy continues to meander along and send mixed signals about its future path. Manufacturing data, economic indicators, consumer spending, and the housing market have all weakened and exhibited signs of a recession. It’s not hard to see signs of a recession in several areas. Meanwhile, the strength of the economy currently lies with the labor market. Real GDP Growth is estimated at +1.3% in 2023 and +0.8% in 2024.
» United Stated Recessions and S&P 500 Performance: Despite weakening over the last eighteen months, the United States economy has been able to avoid a recession thus far, surprising many observers, including us. According to the Federal Reserve, the possibility of a recession sometime this year is “plausible.” A lot of short-term predictions about the market or the economy are just noise. As such, we focus on the fact that recessions can create buying opportunities for long-term investors. During the last 15 recessions, the S&P 500 declined by an average of -30.0%. However, once the market bottomed, performance was very strong over subsequent 1-YR (+50.1%), 3-YR (+79.0%), and 5-YR (+142.1%) periods. Past performance is no guarantee of future results.
» Market Outlook: We are turning cautious in the near term as the S&P 500, currently at 4,450, recently broke out of its 14-month trading range of 3,600 to 4,300. In our opinion, the fundamentals of the stock market do not warrant a recovery back to all-time highs yet. A key tenant to our investment philosophy is to maintain a long-term viewpoint as markets can be incredibly volatile over short-time periods. Markets have historically increased over time as successful corporations have been able to figure out ways to generate profits through advances in innovation and productivity. In our view, investors with a globally diversified portfolio and a long-term horizon should remain optimistic. Historically, equity markets have recovered from recessions and downturns; however, past performance is no guarantee of future returns. It is important to consider your own risk tolerance, financial circumstances, and time horizon when investing.
Please see some of our most recent market commentaries:
• Principles for Long-Term Investing
• Framework for Navigating Current Conditions
• The Power of Compounding
• Bond Primer
US EQUITY MARKETS
The market rally continued in the second quarter as the S&P 500 increased by +8.7% in the period. After gaining +7.5% in the first quarter, the index is now higher by +16.9% in 2023 for the second-best overall start to a calendar year in the last twenty-five years. The S&P 500 officially entered a new bull market in the quarter, which is an increase of +20% from a bear market low. With hindsight the latest bear market officially lasted from January 3rd, 2022, to October 12th, 2022, with a total decline of -24.5%. Since the bear market bottom (10/12/22), the S&P is higher by about +25.9% and is about -4.9% below the all-time high.
We constantly remind our clients to maintain a long-term viewpoint as markets can be incredibly volatile over the short-term. The stock market has historically gone up over time, but returns are not linear. Since 1928, the S&P 500 has generated a total annualized return of +9.5% despite an average peak-to-trough decline of -15% at some point each year. Market performance over the last eighteen months reinforces our belief in a long-term viewpoint. As noted in our S&P 500 Bear Markets chart, historically challenging environments have created strong buying opportunities for long-term investors. Historically, equity markets have recovered from recessions and downturns; however, past performance is no guarantee of future returns. It is important to consider your own risk tolerance, financial circumstances, and time horizon when investing.
The market rally since October was driven by evidence of disinflation, the economy, labor market, and corporate earnings holding up better than expected, and the perceived benefit that artificial intelligence (AI) will have on profits and productivity. The S&P 500 increase has been narrow this year, which means only a handful of stocks are responsible for the overall performance of the index. The top seven companies in the S&P 500, which are mainly considered growth stocks, have performed exceptionally well, including Apple: (+49.7%), Microsoft (+42.7%), Alphabet (+36%), Amazon (+55.2%), Nvidia (+189.5%), Tesla (+112.5%), and Meta (+138.5%). About 20% of S&P 500 stocks are negative for the year with only about 30% outperforming the index. Although a narrow market will frustrate some underperforming portfolio managers who didn’t own enough of the abovementioned stocks, we see little evidence that this type of environment has any predictive power for future returns. Past performance is never a guarantee of future results.
Size / Style / Sector
• Market Cap: Large Caps (S&P 500: +8.7%) outperformed Small (Russell 2000: +5.2%) and Mid (S&P 400: +4.8%).
• Style: Growth (Russell 1000 Growth: +12.8%) exceeded Value (Russell 1000 Value: +4.1%).
• Sector: The market reversal continued in the second quarter with last year’s sector laggards becoming the leaders and vice versa. The three worst performing sectors of 2022 are now the top performers and were all up by double-digits in the quarter: Technology (17.2%), Consumer Discretionary (14.6%), and Communication Services (13.1%). Meanwhile, the two best performing sectors in 2022 finished as the two worst: Energy (-0.9%) and Utilities (-2.5%). The market often undergoes these violent rotations that can make an under-diversified investor feel like a genius one day and a fool the next. Rather than make risky concentrated bets, we prefer to construct diversified portfolios across regions, countries, market caps, factors, styles, sectors, and industries and tilt toward the areas we feel provide the most potential benefit. Asset allocation and diversification do not ensure a profit, protect against loss, or against market risk. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
US FIXED INCOME MARKETS
The Bloomberg Barclays US Aggregate Bond index (Agg), which acts as a proxy for the investment-grade bond market, decreased by -0.8% in the second quarter as the 10-Year Treasury yield increased from 3.47% to 3.84% in the period (bond prices move inversely to interest rates and credit spreads). The bond market is now higher by +2.1% in 2023 and it is still trying to find its footing after coming off the worst calendar year (2022: -13%) since inception of the index in 1976. Please see our Client Question: Bond Primer where we detail bond mechanics, characteristics, types, risks, and historical returns.
Our objective with fixed income is to provide ballast, stability, and income to portfolios. Ballast means that, ideally, the fixed income holdings are increasing when equity markets are declining. Bonds did not provide ballast for most of 2022 as interest rates rapidly increased during the first half of the year. We have continuously stated that we expect the negative correlation between stocks and bonds to return in the future once yields level out and that all else equal the fixed income markets need yields to stabilize rather than decrease to achieve positive returns. We will also point out that the bond market’s return has been positive over the previous year. From June 15, 2022 through the end of the quarter, the 10-Year Treasury yield increased from 3.47% to 3.84%, the exact same increase as in the last quarter (+37 basis points). Yet the Agg’s return from 6/15/22 to 6/30/23 was +1.7%, while the index declined by -0.8% in the second quarter. The contrast in return is due to the differences in coupon payments and price appreciation toward par value over the two periods. In other words, increases in interest rates are less impactful to bond returns over longer periods because bondholders continue to receive coupon (interest) payments while a bond’s price will converge toward par as it gets closer to maturity, assuming no defaults. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise.
Treasury Yields
The Treasury yield curve is still inverted with both the 3-Month (5.28%) and 2-Year (4.90%) higher than the 10-Year (3.84%) yield. In general, the Fed influences shorter term Treasury yields by setting the target federal funds rate while the market controls long term rates as investor demand will vary based on future expectations of inflation and economic growth. An inverted yield curve is a sign of a pessimistic economic outlook and typically signals that investors expect the Fed to cut rates soon. If the Fed does cut rates as investors expect, the 3-Month and 2-Year yields will fall below the 10-Year and the yield curve will be upward sloping again. Please see our Client Question: Yield Curve Inversion.
Yield to Maturity
The yield to maturities of various bond indices are still at their highest levels in years. Yield to maturity is defined as the estimated annualized rate of return an investor can expect on a bond if purchased today and held to maturity, assuming the issuer makes all their interest and principal payments (i.e., no defaults). The yield to maturity on the US Aggregate Bond index was 4.8% at the end of the quarter, which is the highest level since 2008. In other words, future returns from the Agg bond index have not been this attractive in nearly 15 years. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Inflation
The increase in inflation since early-2021 was driven by supply chain bottlenecks, surging energy prices, strong consumer demand caused by a solid labor market, and massive amounts of stimulus. Most inflation readings have decelerated from peak levels with several indicators returning to normalized ranges. Meaningful evidence of disinflation exists in Producer Price Inflation, breakeven rates, ISM Prices Paid data, supply chain indicators, and commodity prices. While the Fed acknowledges overall progress, they are not pleased with the pace of disinflation in the services sector as measured by the Core Personal Consumption Expenditure (PCE) Index. The latest Core PCE Inflation reading of +4.6% is still well above the Fed’s 2.0% target.
The Fed has divided inflation into three buckets: goods (decelerating as supply chains normalize), housing (decelerating under rising mortgage rates but not showing up in inflation data until mid-2023), and non-housing related core services (still elevated due to the strong labor market and robust wage growth). The Fed theorizes the best way to decrease services inflation is to lower demand by weakening the labor market.
The Fed’s latest Summary of Economic Projections show the median participant expects Core PCE Inflation to fall to 3.9% in 2023, 2.6% in 2024, and 2.2% in 2025. Note that the Fed still shows inflation above their 2% target by the end of 2025.
Here are several key inflation indicators and a chart tracking the data since the start of 2020:
• The Bureau of Labor Statistics Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. The index includes food and energy prices.
o Latest Reading: 4.0% (May). Peak: 9.1% (June 2022).
• The Core Personal Consumption Expenditure (PCE) Index measures the prices paid by consumers for goods and services based on surveys of what businesses are selling. Core means that the index excludes food and energy prices. This is the Fed’s preferred inflation measure, which they target at an average of 2%.
o Latest Reading: 4.6% (May). Peak: 5.4% (February 2022).
• The Core Producer Price Index (PPI) measures the average change in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services.
o Latest Reading: 2.8% (May). Peak: 9.7% (March 2022).
• The Bureau of Labor Statistics Average Hourly Earnings tracks total hourly renumeration (in cash or in kind) paid to employees in return for work done (or paid leave). Data is from the Current Employment Statistics (CES) survey.
o Latest Reading: 4.3% (May). Peak: 8.1% (April 2020).
• The University of Michigan Inflation Expectations data is based on a monthly survey designed to gauge consumer expectations. Participants are asked for their view on annual inflation over the next 5 to 10 years.
o Latest Reading: 3.0% (June). Peak: 3.1% (January 2022).
The Fed
The Federal Reserve serves as the central bank of the United States and performs key functions designed to promote the health of the economy and stability of the financial system. The three key entities include the Board of Governors, twelve Federal Reserve Banks, and the Federal Open Market Committee (FOMC). The FOMC sets monetary policy in accordance with its mandate from Congress: to promote maximum employment, stable prices, and moderate long-term interest rates. According to the Fed, “monetary policy directly affects interest rates; it indirectly affects stock prices, wealth, and currency exchange rates. Through these channels, monetary policy influences spending, investment, production, employment, and inflation in the United States.” Please see our Client Question on The Fed which details the key entities, and the impact monetary policy has on the economy, interest rates, and stock prices.
Interest Rates: The FOMC raised the federal funds rate 25 basis points (0.25%) at their May meeting before pausing rate hikes in June. The top end of the federal funds rate now stands at 5.25%. Since March of 2022, the Fed has increased interest rates by 5% total for one of the quickest tightening cycles in United States history. The FOMC’s most recent Summary of Economic Projections (SEP) showed that the median participant expects two more rate hikes this year and for the federal funds rate to peak at 5.6% in 2023 before they cut rates to 4.6% in 2024. The market is currently pricing in about a 75% chance that the Fed will raise rates by another 25 basis points at the July 26th meeting.
Balance Sheet – Quantitative Tightening: The Fed is also reducing the size of their nearly $9 trillion balance sheet. The runoff plan is for monthly caps of about $60 billion for Treasuries and $35 billion for agency mortgage-backed securities. The monthly reduction of about $95 billion is larger than the $50 billion per month pace that was used during the 2017-2019 runoff plan. At the current runoff rate, it will take over 4 years for the Fed’s balance sheet to decrease to its pre-pandemic size.
At their latest meeting, the Fed raised their 2023 forecasts for both economic growth (Real GDP) and inflation (Core PCE inflation). The Fed seems genuinely surprised at the strength of the economy despite several bank failures earlier this year. An old investment adage is that the Fed raises interest rates until something breaks. As several banks “broke” in March, the FOMC forecasted that rate hikes would stop once the federal funds rate reached 5.1%. Now only a few months later, things have calmed in the banking sector and the economy is performing better than expected.
Fed Chair Powell recently stated that, “the process of getting inflation back down to 2 percent has a long way to go and nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year.” The Fed’s view seems to be, “if the economy is still performing well and Core PCE Inflation remains elevated, why not raise rates again?” With this framework, the Fed back to forecasting a peak federal funds rate of 5.6%, which assumes two more 25 basis point rate hikes. In our opinion, the best way to forecast the Fed’s future actions is to focus on Core PCE inflation. If that reading stays elevated, more rate hikes are on the table. On the other hand, if Core PCE inflation decelerates, the Fed will likely hold off on further rate hikes. Since there is only one more PCE Inflation reading between now and the next FOMC meeting on July 26th, we expect another rate hike at that time given the bias toward further tightening. We’re somewhat confused at the Fed’s recent actions to pause in June only to suggest another rate hike in July and potentially another before year end. However, as the past several years have demonstrated, Fed forecasts are only a snapshot in time and they can change quickly.
US ECONOMY
The United States economy continues to meander along and send mixed signals about its future path. After increasing by +2.1% in 2022, Real GDP Growth is estimated at +1.3% in 2023 and +0.8% in 2024. Manufacturing data, economic indicators, consumer spending, and the housing market have all weakened while inflation has decelerated but is still above the Fed’s 2% target. It’s not hard to see signs of a recession in several areas.
Meanwhile, the strength of the economy currently lies with the labor market as the unemployment rate of 3.7% is close to a 50-year low. The service sector, including retail, leisure and hospitality, and health care, continues to add employees and search for new workers. With the Fed actively trying to soften the labor market to bring down inflation by lowering the overall demand for goods and services, we expect the unemployment rate to tick up over the rest of the year. Admittedly, we’ve expected the unemployment rate to increase for several months and have been pleasantly surprised at the resiliency of the labor market to this point.
While the economy has slowed considerably since 2021, it has still been able to avoid the technical definition of a recession for now. As the labor market continues to exceed expectations, the forecasts for the start of a recession keep getting pushed back by a few months. In our view, the economy can potentially avoid a recession if inflation continues to decelerate, which would allow the Fed to stop their tightening cycle before higher interest rates eventually lead to cracks in the jobs market. Please click here or see below for our thoughts on a potential US recession.
United Stated Recessions and S&P 500
The National Bureau of Economic Research (NBER) Business Cycle Dating Committee is charged with maintaining official records of expansions and recessions in the United States. The NBER defines a recession as a significant decline in economic activity while an expansion is defined as a period where economic activity rises substantially. According to the NBER, since 1929 there have been 15 recessions in the US lasting an average of 13 months each.
Despite weakening over the last eighteen months, the United States economy has been able to avoid a recession thus far, surprising many observers, including us. We started writing that a mild US recession felt inevitable last summer, and we have been pleased thus far at the resiliency of the labor market, which has kept the economy in expansion territory. Several recessionary indicators are still flashing yellow or red, including the yield curve, leading economic indicators, and the ISM Manufacturing survey. According to the Federal Reserve, the possibility of a recession sometime this year is “plausible.” While the economy may still fall into a recession, we continue to believe that the contraction would be far less severe than previous significant economic declines like the Global Financial Crisis of 2007 – 2009 as consumer leverage and balance sheets are in far better condition.
An over-simplified business cycle historically followed a similar pattern: the economy expands rapidly – unemployment falls – inflation overheats – financial bubbles forms – the Fed responds by raising interest rates – credit tightens – good borrowers struggle to find loans – the economy stumbles – a recession occurs – the economy bottoms – repeat. We’ve seen the first stages of the business cycle play out starting in mid-2020. At this point, it is unclear whether the turbulence that started with Silicon Valley Bank will lead to a full-blown credit crunch, but we do expect that banks will tighten their lending standards and face stricter regulations, which will lead to slower overall economic growth and increased odds of an official recession.
The good news for long-term investors is that the S&P 500 already priced in an average recession last year when the index fell by -24.5% from January 3rd through October 12th. We are not sure if October 12th marks the ultimate bottom for this period, although unless your view is that this is the start of another Great Depression or Financial Crisis, then a lot of the damage in the equity market may have already occurred at the recent low.
A key tenant to our investment philosophy is to maintain a long-term viewpoint. A lot of short-term predictions about the market or the economy are just noise. As such, we focus on the fact that recessions can create buying opportunities for long-term investors. During the last 15 recessions, the S&P 500 declined by an average of -30.0%. However, once the market bottomed, performance was very strong over subsequent 1-YR (+50.1%), 3-YR (+79.0%), and 5-YR (+142.1%) periods. Historically, equity markets have recovered from recessions and downturns; however, past performance is no guarantee of future returns. It is important to consider your own risk. tolerance, financial circumstances, and time horizon when investing.
OUTLOOK
Our market outlook is based on four pillars: Monetary Policy, Economic Growth, Corporate Earnings, and Valuation.
The market rally since October was driven by evidence of disinflation, the economy, labor market, and corporate earnings holding up better than expected, and the perceived benefit that artificial intelligence (AI) will have on profits and productivity. Despite the strong performance over the past several months, significant market and economic risks remain. We continue to separate our outlook into short- (months) and long-term (years) periods.
Short-Term: We are turning cautious in the near term as the S&P 500, currently at 4,450, recently broke out of its 14-month trading range of 3,600 to 4,300. In our opinion, the fundamentals of the stock market do not warrant a recovery back to all-time highs yet. Valuations are stretched, especially given current interest rate levels (Client Question: Why do Interest Rates Impact Stock Prices?). While earnings have come in better than expected, they would face downside risk if the economy began to stumble. Furthermore, while the Fed is likely close to ending their tightening cycle, services inflation remains sticky, which may cause the FOMC to continue raising rates. Adding it all up, we would expect some consolidation after the strong year-to-date performance with a move back down into the upper end of the recent trading range as a probable outcome. The S&P 500 is on pace to increase by nearly +37% in 2023, which seems unlikely in our view. A digestion period is healthy for the market’s long-term potential as market booms are typically followed by busts (the S&P 500 performance from 2021 through 2022 is the latest example). If the market were to break toward the bottom end of its trading range, our short-term view would turn more positive, and we would look to add to equities in actively managed portfolios. If the S&P were to keep increasing toward all-time highs, our short-term view would turn increasingly cautious, and we would begin trimming equities. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Long-Term: A key tenant to our investment philosophy is to maintain a long-term viewpoint as markets can be incredibly volatile over short-time periods. As the market sold off last year, we reminded clients that difficult periods create opportunities for long-term investors. While market weakness may return, staying invested or adding to existing holdings throughout 2022 looks like a great decision right now. Markets have historically increased over time as successful corporations have been able to figure out ways to generate profits through advances in innovation and productivity. In our view, investors with a globally diversified portfolio and a long-term horizon should remain optimistic. We continue to believe in the value of time, diversification, and the power of compounding. Historically, equity markets have recovered from recessions and downturns; however, past performance is no guarantee of future returns. It is important to consider your own risk tolerance, financial circumstances, and time horizon.
We will continue to rely on our time-tested process while looking for opportunities to tax loss harvest, reposition and rebalance portfolios, and selectively put money to work for clients that have recently made contributions to their accounts. On the equity side, we remain tilted toward high quality US stocks. On the fixed income side, we are taking advantage of the highest yields in over a decade while continuing to focus on achieving ballast, stability, and income as well as accounting for short-term cash needs. There is no guarantee a diversified portfolio will outperform a non-diversified portfolio and all investing involves risk including loss of principal.
SECOND QUARTER 2023 MARKET RETURNS
DISCLOSURES
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
All indexes mentioned are unmanaged indexes which cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The S&P Midcap 400 Stock Index is an unmanaged index generally representative of the market for the stocks of mid-sized US companies.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
The Russell 1000 Growth Index measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values. Russell 1000 Value Index measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values.
The Russell 3000 Growth Index is an unmanaged index comprised of those Russell 3000 companies with higher price-to-book ratios and higher forecasted growth values. The Russell 3000 Value Index measures the performance of those Russell 3000 companies with lower price-to-book ratios and lower forecasted growth values.
The prices of small cap stocks and mid cap stocks are generally more volatile than large cap stocks. The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. The MSCI EAFE Index consists of the following developed country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the UK.
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia. The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece,
Hungary, Poland, Qatar, Russia, South Africa. Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.
The MSCI US Broad Market Index captures broad US equity coverage. The index includes 3,204 constituents across large, mid, small and micro capitalizations, representing about 99% of the US equity universe.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.
The Barclays Capital US Corporate High Yield Bond index is an index representative of the universe of fixed-rate, non-investment grade debt.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.
The Bloomberg Barclays US Treasury Bills 1-3 Month Index is designed to measure the performance of public obligations of the U.S.
Treasury that have a remaining maturity of greater than or equal to 1 month and less than 3 months. The Index includes all publicly issued zero coupon U.S. Treasury Bills that have a remaining maturity of less than 3 months and at least 1 month, are rated investment grade, and have $300 million or more of outstanding face value.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply.
High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.
The market value of corporate bonds will fluctuate, and if the bond is sold prior to maturity, the investor’s yield may differ from the advertised yield.
Financial planning is a tool intended to review your current financial situation, investment objectives and goals, and suggest potential planning ideas and concepts that may be of benefit. There is no guarantee that financial planning will help you reach your goals.
Asset allocation does not ensure a profit or protect against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.
Diversification does not protect against market risk. All investing involves risk which you should be prepared to bear.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through Winthrop Wealth, a Registered Investment Advisor and separate entity from LPL Financial.