Contributors: Andrew Walker, Bruce Ensrud, Matt Stockman
THE SHORT STORY
The widely held belief that 2023 would be marked by a recession has not yet materialized – this despite very notable headwinds, including ongoing Fed rate hikes, geopolitical risks, a banking crisis, and more. Instead, AI, falling inflation, strong economic data, and hopes of an end of Fed rate hikes have driven market substantially higher.
Going forward, while the outlook has improved significantly since the start of the year, we do see the odds of (at least a minor) recession rising based on a growing body of forward-looking economic data. Recessions are a normal part of the economic cycle and, rather than fearing them, investors should focus on constructing resilient portfolios that embrace their inevitability. Given this, rather than chase hot areas of the market (like AI), we continue to be focused on companies with compelling valuations, strong fundamentals, and the ability to compound capital steadily over full market cycles.
Where We’ve Been – 2023 Q2 Review
Despite widely held beliefs that 2023 would be marked by a recession, we sit here halfway through the year defying those predictions even in the face of developing geopolitical risks, a banking crisis (remember that?) and the Federal Reserve (Fed) continuing to raise rates. Thanks to buzz around AI, falling inflation, strong economic data, and hopes that the Federal Reserve is near (or at) the end of its hiking cycle, markets have marched steadily higher all year. In fact, an increasing number of market participants are expecting a soft-landing scenario, where no recession is experienced.
Second quarter and year-to-date returns are shown below.
| Market Category | Market Index | Q2 2023 | YTD 2023 |
|---|---|---|---|
| US Large Cap | S&P 500 | 8.7% | 16.9% |
| US Small Cap | Russell 2000 | 5.2% | 8.1% |
| International Developed | MSCI EAFE | 3.2% | 12.1% |
| Emerging Markets | MSCI Emerging Markets | 0.9% | 4.8% |
| US Bonds | BB US Aggregate | -0.8% | 2.1% |
| US Dollar | DXY* | 0.4% | -0.6% |
Where We’re Going – Q3 2023 Outlook
If we were to wrap up 2023 now and evaluate our themes for the year – continued volatility, moderating inflation, and a bear market bottom – we could declare victory. Admittedly, however, a deeper look into markets suggests that 2023 has not come to pass quite as we drew it up. An AI “revolution”, multiple banking failures across the globe and China’s cautious reopening were not part of our base case. That said, our allocations are neither built on short-term views nor reliant on getting every detail precisely right.
While we do see the odds of (at least a mild) recession rising based on a growing body of forward-looking economic data showing the potential for slower future growth across the globe, it is important to acknowledge that recessions are a normal part of the economic cycle, and rather than fearing them, investors should focus on constructing resilient portfolios that embrace their inevitability.
So, as we lift our gaze toward the long-term, we remain confident that our portfolio positioning remains consistent with maximizing the likelihood of our clients reaching their goals. Rather than chasing hot areas of the market (like AI), we will continue to patiently focus on companies with compelling valuations, strong fundamentals, and the ability to compound capital steadily over full market cycles.
Discover a Different Story
In an environment of economic uncertainty, we encourage focusing on all your gifts of wealth. When we redefine wealth to include your finances, but also your attitude, time, relationships, and abilities – your story can transform.
Here are a few prompts to help you root into a story of hope and contentment:
- What attitude can you adopt when going about your day?
- How and where will you spend your time?
- How will you invest in your treasured relationships?
- What impact could you have with your abilities?
Thank you for allowing us to partner with you as we navigate the ever-changing market. We appreciate your continued trust.
If you have questions or would like to dive deeper into this quarter’s outlook, please reach out to our investment team. We’d be happy to set up a virtual coffee to talk more.
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Index Benchmarks presented within this report may not reflect factors relevant for your portfolio or your unique risks, goals or investment objectives. Past performance of an index is not an indication or guarantee of future results. It is not possible to invest directly in an index.
The Bloomberg U.S. Aggregate Bond® Index, or the Agg, is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Investors frequently use the index as a stand-in for measuring the performance of the U.S. bond market.
The MSCI EAFE® Index is a broad market index of stocks located within countries in Europe, Australasia, and the Middle East.
The MSCI Emerging Markets® Index is a selection of stocks that is designed to track the financial performance of key companies in fast-growing nations.
The Russell 2000® Index measures the performance of the 2,000 smaller companies that are included in the Russell 3000® Index, which itself is made up of nearly all U.S. stocks. The Russell 2000® is widely regarded as a bellwether of the U.S. economy because of its focus on smaller companies that focus on the U.S. market.
The S&P 500® Index, or the Standard & Poor’s 500® Index, is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies.
The U.S. Dollar Index – known as USDX, DXY, DX and USD Index – is a measure of the value of the United States Dollar (USD) against a weighted basket of currencies used by U.S. trade partners. The index will rise if the Dollar strengthens against these currencies and fall if it weakens.