2Q23 Letter: "Staying the Course"

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Business Update

During the second quarter of 2023, Evolve Investing continued its growth trajectory. We added several new clients and our assets under management increased by 14% from the end of last quarter, to an all-time high. We are currently in expansion mode, and anticipating our first full-time hire this summer. We are also considering adding an additional advisor later this year.

Despite a rally in broader market indices during the last quarter, economic and policy-related headwinds prevail. As your advisor, my goal is to help you navigate short-term challenges while focusing on your long-term goals for wealth creation. As always, you’re welcome to reach out to me directly anytime to discuss the markets and your investments.

 

Reflections on 2Q23

During the second quarter of 2023 most risk assets performed well, with the S&P 500 up roughly 13% year-to-date driven by (1) signs that inflation is moderating, (2) outsized performance in stocks with end markets linked to artificial intelligence, and (3) a growing appetite for risk.

However, a deeper dive into the drivers of the S&P 500 performance suggest that excitement over artificial intelligence was the primary driver of this year’s gains. Excluding the performance of Tesla (TSLA), Nvidia (NVDA), Meta Platforms (META), Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), and Amazon (AMZN), S&P 500 returns were closer to 3% in the quarter.         

 

Performance of Big 7 Tech Stocks vs. S&P 500

  

During the quarter, the Federal Reserve announced that it is pausing is aggressive path of rate increases. Nonetheless, the Fed remains committed to additional rate increases throughout the year, and potentially beyond, as inflation remains above its 2% goal. Given this policy backdrop, as well as lingering recession fears, more interest rate sensitive sectors of the market remain susceptible to downward pressure.  

Core and Overall PCE, The Fed’s Preferred Measure of Inflation

Accordingly, many Wall St. strategists are pointing to a challenging second half of the year for the stock market. Major bank strategists’ predictions are summarized below:

  • Goldman Sachs seems to expect the bear market to be over, and is targeting 4,500 for the S&P 500 by year-end. 

  • Morgan Stanley expects the markets to follow the 1945-1949 “Boom/Bust” pattern below, with a 16% drop in the S&P 500 by year-end. 

  • Bank of America anticipates a selloff and doesn’t see the current bull market as sustainable.

  • Citigroup expects the S&P 500 Index to decline to 4,000 by year-end. 

 

The Importance of a Long-term Investment Horizon

Late year, I highlighted in my 3Q22 letter that investors who hold a long-term perspective tend to generate better returns over time. For many individual investors, maintaining a long-term perspective means remaining committed to a strategy that suits their overall risk appetite and specific goals throughout economic and market cycles.

Based on a recent survey by Ernst & Young’s wealth management unit, during last year’s market rout millennials were more likely than any other generation to sell their positions in equities. Nearly half of millennial investors moved their portfolios into cash amid market volatility, compared to just 34% of Gen X and 24% of Baby Boomers. While this year’s rally took many by surprise, those who moved to cash missed out on meaningful gains.

Academic studies have shown that when investors focus too much on the short-term, and sell stocks as an overreaction to recent losses, they often tend to miss market recoveries. Data collected by JPMorgan Asset Management show that investors who were absent for the S&P 500’s ten best days from 2022-2022 received half the gains of those who remained invested for the entire period.

 

Performance of $10,000 invested in S&P 500 in 20 years to end of 2022


How We’re Positioning

With that long-term perspective in mind, I continue to hold equities across nearly all of my clients’ portfolios, including positions in Tesla (TSLA), Apple (AAPL), Microsoft (MSFT), Alphabet (GOOGL), and Amazon (AMZN). However, I continue to prefer less interest rate sensitive areas of the stock market, and most of our strategies are currently underweight stocks relative to other assets.

Our fixed income strategies reflect my preferences among U.S. government and corporate bonds as well as senior secured loans. Within government bonds, I’ve increased my allocations to treasury bills with maturities inside of one year. Within the corporate fixed income category, I continue to like BB-rated bonds with effective yields close to 7.0%, and relatively low default rates within the high yield category. 

 

S&P 500 Earnings Yield vs. 3 Month Treasury Rate vs. US BB Bond Yield

Final Thoughts

Consistent with my first quarter outlook, my sense is that confidence will remain fragile while volatility will remain elevated throughout 2023. My current strategies remain oriented to this perspective, with a bias toward managing downside risk.

Please reach out anytime to discuss any of the above themes and how your portfolio is positioned. Thank you for your continued support and confidence in Evolve Investing.

 

Best,

 

Peter Hughes, CFA, CEPA®

Peter Hughes, CFA