Wealth isn’t primarily determined by investment performance, but by investor behavior.” - Nick Murray
As we write this, the S & P 500 is up 16.39% year to date (08/10/23).
With over half of 2023 in the rearview mirror, it’s instructive to look back at the challenging events and conditions that marked the path since March of 2022. In this period:
- The Fed raised rates by over 500 basis points.
- There was a run on regional banks in March of 2023.
- China’s reopening from the Covid lockdowns was a bust.
- Core inflation has remained well above Fed targets (especially housing and wages).
- The Euro Zone has and is flirting with recession.
- The yield curve remains steadfastly inverted (indicating recession).
- The Ukraine war grinds on after eighteen months.
Given all of this, would you have predicted that unemployment wouldn’t rise above 3.7%, that real GDP growth would average 2.6%, and that the S & P 500 would have recovered as much as it has? Not us. Notwithstanding the sound and fury of Covid and seen from a longer perspective, the S & P is over 50% higher than it was before the pandemic. The NASDQ composite for its part is even higher.
In hindsight, the unprecedented impact of more than $5 trillion in fiscal stimulus provided an impactful and lasting boost, leading to an enduring wealth effect. Essentially turning government borrowing into consumer assets. It’s true that policy tightening has a lag effect. We expect to see gradual slowing in economic activity and perhaps the “soft landing” that only months ago we thought was unlikely. Inflation has already come down from a high of over 9% to core levels of just over 3% today.
With the Q2 earning season about three quarters behind us and having sat through innumerable earnings conference calls, it’s clear that many of our companies are experiencing “challenging end markets.” The combination of higher interest rates, Covid over-ordering, heightened channel inventories, and conservative forecasting is largely to blame.
A key takeaway from all of this is that market timing is a losing proposition. There is no “sell by” date or “end of game.” Short term hedges or bets seldom work. Instead, we find success by sticking to a plan as we incorporate new data into our decision-making process. We reduce near-term price volatility in the portfolios through diversification and an asset allocation structure that aligns with specific risk tolerance levels.
As a side note, after decades of managing portfolios, we’ve found that when the pain of a correction becomes visceral, we’re invariably better off not being reactive. Our experience teaches us that selling in these situations is almost always a bad idea and in fact, these moments often indicate we’re at or near a bottom.
We’ll humbly forego short-term forecasting and instead continue to structure and manage portfolios built for the long haul.
One last aside, it’s wonderful to be earning upwards of 4.40%* in the money market funds and over 5.00%* in some of the US treasuries. Turns out there is a silver lining to the Fed’s aggressive tightening.
Amidst ups and downs, we're steadfast in our strategy, embracing a future of prosperity together.
Ken Brown & Michelle Kessel-Harbart