Mid-Year 2023 Review and Investment Strategy for the Second Half
U.S. STOCK MARKET BEHAVIOR.
The first half of 2023 is a classic example of the waves investments can create. The movement in the prices of stocks or bonds does not closely relate to the headlines describing the economy, politics, the Federal Reserve posture and more. Higher interest rates, a series of bank failures, down to the last-minute debt-ceiling drama, elevated inflation, war in Europe and the most widely predicted recession in recent history defined the first half of 2023. And with that, fortunes grew as stock prices in the U.S. shrugged off the concerns. Most major averages are coming into the second half with impressive returns. History suggests the momentum could continue.
Since 1950, the S&P 500 has historically followed a positive first half, as we have had this year, with a mid-single digit gain in the second half of the year. That said, bull markets are not linear, and pullbacks (or even a correction) should also be expected in the second half. This is not a bold call but a reflection of history. The chart below shows that since 1950, even a positive start to the year undergoes a decline within the second half of the year of about 9%.
In 2022, our goal was to guard your future. The combination of a 60% stock portfolio and 40% bond portfolio delivered its worst performance since 1931. That's a long time. Rather than sit on the sidelines, our discipline led us to guard the future of our clients. Fast forward to 2023, and we can grow fortunes by holding income-delivering Treasury bonds and buffered stock holdings.
THE OTHER SIDE OF THE POND.
This brings us to the international stock asset class. Almost half of the stock market opportunity set is found outside of the U.S. Right now, international stocks are trading at a significant discount relative to the U.S. and, on average, offer higher yields. That said, valuation metrics are poor timing tools; however, relative earnings growth is a very good one. Recently, U.S. earnings expectations have been coming down, while they have been more resilient (and even positive) in other areas of the world. We continue to monitor the potential for a turning point in earnings growth in international regions versus the U.S., which combined with discounted valuations, make the case for greater exposure to international stocks. We continue to monitor the relative performance between U.S. and international developed stocks to determine when it may be prudent and productive to continue to build international stock exposure. This is done through ETFs: ETFs create exposure across a wider set of countries, rather than just one or two.
HIGHER FOR LONGER.
The Federal Reserve remains concerned about the level of inflation and continued to raise interest rates in the first part of 2023, as it has aggressively since March 2022. The rapid increase in the Federal Reserve’s interest rate is the steepest in 50 years. Core inflation, the problem the Fed is seeking to solve, is moving in the right direction, but it continues to do so at a very slow rate. Because of this, most members of the Federal Reserve expect rates to continue to rise during the second half of this year. While this creates problems in certain ways, including likely job losses for many Americans, higher rates present opportunities that are reflected in your portfolio. We regularly buy one-year and shorter Treasury bonds on to benefit from the roughly 5% interest rates available.