Review
Stocks are off to a hot start as we venture into the second half of 2023, setting a blazing pace for the year. Leading the charge is the NASDAQ, which has soared an impressive 36% year-to-date. This remarkable surge can be largely attributed to the resurgence of tech stocks which were beaten up in 2022, fueled by the exhilarating advancements in artificial intelligence. Experts strongly believe that these developments will ignite the next productivity boom.
Not to be outdone, the S&P 500 has also performed admirably, boasting a solid 13% increase year-to-date. Once again, tech stocks have played a pivotal role in propelling its growth. However, the Dow Jones has experienced a more modest upturn, with a gain of 2.4% year-to-date.
Additionally, the recent performance in equities has caused valuation multiples to expand beyond historical norms, making the stock market more expensive. According to JP Morgan, the S&P 500 trades with a forward P/E of 18x, above the 20-year average of 15.5x.
Furthermore, the overall economy remains robust, characterized by low unemployment rates that defy the numerous predictions of an impending recession. Encouragingly, inflation appears to be moving in a positive direction, and the Federal Reserve has decided to pause its interest rate hikes for now.
Outlook
While the excitement surrounding the AI boom is undoubtedly justified, it is crucial to acknowledge that technological revolutions of this magnitude unfold over an extended period of time. While the long-term prospects for the global economy are promising, it appears that we are currently navigating the latter stages of the economic cycle.
In order to have a fair perspective on the stock market’s performance year to date, it’s important to zoom out and look at where we came from. Stocks endured a drawdown in 2022, which means that they may have been due for a bounce this year. However, it is worth noting that valuations remain relatively high, especially in a rising rate environment with recession fears looming.
Moreover, interest rates are currently elevated compared to historical standards. A significant portion of recent equity investment hinges on the expectation of the Federal Reserve reducing interest rates and the economy displaying resilience. Nevertheless, the likelihood of these two events occurring simultaneously is rather slim.
By considering these factors and adopting a broader viewpoint, we can better comprehend the complexities at play in the market and make informed decisions about our investment strategies.
Commentary
At Webber Advisors, our investment philosophy revolves around maintaining a steadfast long-term perspective. We hold a positive outlook on the equity market in the long-term, both domestically and internationally. However, we recognize the need for caution in the immediate future when it comes to equities. This caution arises from several factors, including elevated interest rates, the looming presence of a recession, and high stock multiples. Consequently, we emphasize that the risk in equities lies predominantly towards the downside.
To effectively communicate and act upon this perspective, we have implemented a strategic investment approach that safeguards our equity exposure against potential downturns. Through the implementation of a structured note, we have established a downside buffer of 20% on our equity holdings. This strategic move ensures that we can navigate market uncertainties while retaining the potential for capturing gains when favorable market conditions arise.
Regarding the fixed income component of our portfolio, we believe that the outlook for near-term returns has improved compared to the past, primarily due to rising interest rates. For the first time in a considerable period, we can achieve respectable yields within the fixed income segment of our portfolio. Moving forward, the returns in fixed income will significantly depend on the Federal Reserve’s future actions and policy decisions.
Additionally, we continue to use alternatives to enhance our portfolios as part of our core-satellite approach. Adding alternatives can boost returns, provide diversification, generate income, or hedge downside risk. We are particularly attentive to digital assets given recent institutional moves into the crypto space. We will continue to assess their fit within the portfolio and monitor the evolving landscape to identify potential opportunities and risks. Our goal is to generate favorable risk-adjusted returns for our clients while embracing innovative avenues for growth.
nsefchok@webberadvisors.com mcrownover@webberadvisors.com
Securities offered through Registered Representatives of Cambridge Investment Research, Inc., a broker-dealer, member FINRA/SIPC. Investment advisory services offered through Investment Advisor Representatives of Cambridge Investment Research Advisor, Inc., a Registered Investment Advisor. Webber Advisors and Cambridge are not affiliated.
