A Breath of Fresh Air

Paul Morrone |

By Paul Morrone, CFP®, CPA/PFS, MSA

A much-needed breath of fresh air came during the second quarter of 2023. After a roller coaster during the first quarter that was fraught with market volatility, bank failures and heightened uncertainty, the second quarter felt relatively mundane by comparison.  Now up over 30% from their October ’22 lows, large cap US Equities (as measured by the S&P 500), while volatile at times, have posted some strong results recently. Investors are certainly not complaining. 

But not all stocks are created equal. Many have heard of the FAANG stocks, which were the big tech names that dominated equity markets for nearly a decade. But FAANG is so last year. The story of the second quarter was all about the ‘Magnificent 7’ (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla), many of which rallied because of their involvement in artificial intelligence (remember all the ChatGPT hype?). These 7 names contributed to the lion’s share of S&Ps performance during the quarter. While it is still a welcome sign to see equity markets rise, we understand that the stock market and investible universe extends beyond these seven names. The good news is that market breadth is expanding as the third quarter has started to unfold and stocks outside of the Magnificent 7 are showing signs of life – a healthy sign that buyers are seeing value in companies outside of the top names.

While markets are certainly the highlight of what investors are focused on, there are several underlying economic conditions that are giving investors confidence as 2023 unfolds.  In general, the US economy remains on solid footing, despite a rocky start to the year. A persistent bright spot since 2021 has been the labor market, which has recently yielded the highest wage gains in 20 years. Unemployment remains low and the labor force participation rate remains high. Of note is that a smaller domestic workforce (attributable to boomers who retired early during the pandemic and those electing to work part time) is helping to keep conditions tight and employers on the search for qualified workers. Either way, should the war against inflation continue to trend in a positive direction, a strong labor market may help keep consumers spending well into 2024.

And one can argue that the housing market, often a key indicator of the health of the American consumer, has shown little signs of softening after the pandemic boom, even in the face of substantially higher mortgage rates. Supply constraints have notably contributed to the resilience here, but demand – arguably the more important factor – remains strong and widespread, keeping housing values elevated as we move into the second half of 2023.

Those who embrace living in the moment have been able to sleep better as of late, as the rally we experienced during the second quarter has extended into July. But we remind investors never to become complacent. Risks are always persistent in any market, and it is always wise to expect the unexpected. This is especially true during the last legs of a tightening cycle in a world still very much in recovery from an ‘unprecedented’ pandemic. Previous market highs set in early January of 2022 are still a way off and a myriad of risks exists that can have a substantial impact on both equity and fixed income markets. An unanticipated upside surprise in the inflation numbers may cause the Fed to reevaluate their path forward – mandating additional rate increases that exceed the currently expected quarter point during the fourth quarter. This could trigger another revaluation of asset prices, resulting in volatility across virtually all asset classes. 

But it is equally important to embrace the good times as it is to be prepared for the future – whatever it may bring. Within our investment portfolios, we continue to evaluate the ever-changing investment landscape and evaluate risk as the equity rally continues. As US equities continue their outperformance into the third quarter, we are monitoring allocations to this asset class which has now become marginally overweight across many portfolios – a position we remain comfortable with for the time being. In instances where certain asset classes have become too dominant relative to our targets, we have been selectively rebalancing those accounts to bring them back in line with our tolerances. Additionally, we are evaluating opportunities available within the fixed income space – which now has the highest yields that we’ve seen in over 10 years and may benefit when the Fed ultimately finishes their tightening cycle and looks to cut rates in the future (which we don’t expect anytime soon). 

Either way, this was certainly not the year to ‘sell in may and go away,’ as the old saying goes. Those trying to time the market or banking on seasonal trends were likely left behind as investor confidence has gotten stronger throughout the year. Whether the current rally continues or fizzles out is not of the utmost importance, rather, remaining patient and disciplined will inevitably reward those who make decisions based upon logic rather than emotion.  

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
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 investing involves risk including the possible loss of principal. No strategy assures success or protects against loss.
The content is developed from sources believed to be providing accurate information.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.

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