Bigger picture threats to the global economy remain. Here in the U.S. some uncertainty in the banking sector is still prevalent and there is evidence that the consumer is not as robust as it was towards the beginning of the year. And while we believe the Fed may pull off the elusive ‘soft-landing’ (a balancing act of higher interest rates but not cooling the economy to the point of recession) we feel the odds of recession are diminished but not out of the question. If indeed we slip into a recession, it is most likely mild, and not the likes of what we’ve seen periodically over the last 20 years.
All of that said our consensus is that the worst of the bear market cycle of 2022 is likely behind us. Evidenced by strong (but not record breaking) corporate profits, a continually resilient labor market, a weaker dollar and lower transportation and energy costs when compared to coming out of the covid age. In addition, the actions of the Fed have slashed inflation by 2/3 when compared to the high in June of last year.
There has been a lot of talk about concentrated equity returns year-to-date as it relates to the S&P 500 index. To shed light on that, the top 10 performers hold an approximate 30% allocation out of the 500 stocks that comprise the S&P 500 index, yet represent 70% of the index’ return thus far in 2023. And while not justification for the models’ muted returns (which own 3 out of the top 10 excluding ETF holdings), certainly cause to question whether or not a new bull market has formed. In theory when just a handful of companies are carrying the load, is the ‘market’ truly beginning a new trend…?
To a certain extent the models believed so, if even just short to intermediate term, and thus the rotation out of above average allocations to cash, which the models held tightly to begin the year and which bled over into Q2. The result, a subsequent repositioning into more growth-oriented equities. A rotation indeed, albeit in moderation. We’ve talked about searching for traction in previous Newsletters and Weekly Market updates, a process we feel now has legs, perhaps in its infancy stage but legs none the less. One which limited the number of trades over the course of the quarter, giving us confidence looking ahead. Fewer trades lead to more sustainable and longer-term holds. Perhaps evidence of a trend after all.
Higher yields in fixed-income and cash equivalents helped to provide ballast to equity risk. A nice comfort having spent the previous decade+ in a near 0% rate environment. We do not foresee a change in our U.S. Treasury Bill laddering strategy in the foreseeable future. A relatively risk-free investment is finally offering a measurable return.
It is not to say there aren’t potential headwinds, but for the first time since early 2022 the models are positioned well to embrace whatever lies ahead.
We look forward to hearing from you soon.
