Q2 2023 Market Recap and Portfolio Update
I hope this letter finds you enjoying the summer season and that you had a wonderful Independence Day celebration. As the weather heats up, we have observed a parallel in the financial markets, with significant activity throughout the second quarter of 2023.
The overall economic landscape remained steady against a tightening monetary policy. The Consumer Price Index (CPI) saw a modest increase of +0.2% in June, indicating manageable inflation. Meanwhile, the low unemployment rate of 3.6% is a positive indicator of our robust economy. Year to date, the market has shown an upward trend. The best performer was the large-cap growth category, with an impressive surge of nearly 30% from last year’s 30% loss. The sectors leading the way have been technology, communication services, and consumer discretionary. Conversely, energy and utilities have lagged due to competition with higher-yielding treasuries and corporate bonds.
In recent weeks, we have noticed a broadening of the rally. Small and mid-cap stocks, as well as emerging markets, have started to gain momentum. Lower-quality bonds have outperformed on the fixed-income side, while yields on higher-quality bonds have remained range bound. However, volatility in high-quality bonds is still possible if inflation surprises in either direction.
With these market conditions in mind, we have made strategic adjustments to our model portfolios. Our models remain overweight equities as they have been all year. We maintain an overweight to small and mid-cap equities and have added to international markets in anticipation of a broad rally. For fixed income, we have maintained a 25% position in low-quality bonds, using high yield, emerging market debt, and bank loans. The remaining 75% comprises high-quality bonds, evenly split between short-maturity bonds and intermediate to long-maturity bonds.
We are carefully monitoring the interest rate environment considering the economic outlook and inflation readings. Over time, we aim to increase our weighting in longer-term bonds, to lock in yields and protect against a decreasing interest rate environment.
The economy has remained resilient; however, market sentiment remains cautious. A fact to consider amid this market rally; Since 1950, when the S&P 500 has been down 25% or more, it has returned a negative 1-year return only once. It has never produced a negative 3, 5, or 10-year return from the trough.
As always, we remain committed to aligning our strategies with market trends and your investment goals. Please feel free to reach out should you wish to discuss any aspect of your portfolio or our market outlook in more detail.
Thank you for your trust in our expertise.
Best regards,
Jason
