It’s been a while, but we can confidently say:
Last quarter was—good.
The S&P was up 7.5%.
Overall, we anticipate continued market volatility. Still, the uptick feels nice!
(Go ahead, savor it for a moment. You’ve earned it after last year’s turbulence. Also, nice job staying the course.)
Candidly, last quarter’s improvement was a little surprising, given the worry flooding the news, i.e., looming recession.
There are two key factors driving the welcomed increase, including:
#1—Companies, institutions and individuals flushed with cash slowly reinvested it.
#2—Tech stocks are up 17% since the beginning of the year, rebounding from last year’s 30% low.
Looking Ahead
Driven by recession fears, it’s likely we’ll see the market pull back some during the second quarter. As of now, we’re not in a recession. However, there’s relentless recession-forecasting news which can cause consumers to reduce their spending.
Keep in mind, consumer spending makes up two-thirds of the economy.
If consumers slow their spending, the economy then slows—kindling a recession.
As we’ve said before, most families won’t feel a recession’s impact unless a family member is laid off.
Recessions & Psychology
Recessions can be caused by psychological mindsets; specifically, how individuals and businesses perceive their future economic situations.
Case-in-point: The recent Silicon Valley Bank failure, debt ceiling showdown, cryptocurrency meltdowns and tech layoffs are creating emotional havoc.
Yet, some concerns are unwarranted.
For Example:
Sure, there are tech layoffs, but most of these companies overhired during the pandemic.
Said differently, they still have more employees now, than before the pandemic.
False perceptions often arise when consumers are not presented with both sides of the story.
Your Portfolio: What we’re doing right now.
Beyond ongoing rebalancing and risk management activities, there are two key investment initiatives we’re currently focused on, including:
#1—Increasing Bond Durations
During 2022, we shortened bond durations to help protect your portfolio from increasing interest rates. However, now that rate increases are slowing, it makes sense to (slowly) extend bond durations.
Remember, bond prices are inversely related to interest rates, i.e., when interest rates decrease, bond prices generally increase.
In other words, by extending the duration of bonds, we can potentially benefit from the increase in bond prices that may occur due to the expected trend of decreasing interest rates.
#2—Evaluating International Stock Investments
During the last 10 years, the United States has outperformed international markets and, therefore, we’ve maintained low international exposure. We also reduced our international holdings by one-third, following the Russian invasion of Ukraine.
However, today many international stocks have become very cheap compared to U.S. markets.
The key question is:
Are there deals to be had?
To answer this, we’re currently evaluating if these stocks are cheap because they deserve to be cheap, i.e., they stink, or did the markets overshoot. Specifically, markets tend to overshoot when stock prices are falling, moving lower than warranted.
We continue to evaluate the situation and may dip our toes back in during the second quarter.
Keep in mind, we currently have international exposure via the S&P 500; specifically, 40% of its revenues are international.
For example, Coca-Cola, Microsoft, Apple, etc. are U.S. based companies, but all do business globally.
Federal Debt Ceiling Showdown
We’re faced again with another government debt-ceiling argument, given that the U.S. Treasury starts running out of money this summer.
The debt ceiling is a legal limit on the amount of debt the U.S. government can accumulate, and if Congress fails to raise it, it could lead to a government shutdown, default on debt payments and a potential downgrade of U.S. credit ratings.
Candidly, the likelihood of this happening is low, given the historical precedent of Congress eventually coming to an agreement.
Also, it’s likely President Biden wants to maintain the financial stability, credibility and prestige of the U.S. He can’t accomplish this by defaulting on our country’s debt obligations.
For a deep dive regarding the political showdown, read Capital Group’s article, Debt ceiling showdown: Should investors worry?
Your Cash
If you have a significant amount of cash in your local savings or checking accounts, it’s worth considering that money market accounts are currently offering a return of approximately 4.5%, while short-term government bonds (3-12 months) are paying around 4.6%.
This is significantly higher than the return of a typical savings account, which is currently paying only around 0.05% or less.
If you’re concerned about liquidity due to short-term needs, there are solutions. Give us a call, we’re happy to discuss them with you.
–David Bunker, Financial Advisor & Fiduciary
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