Dear Clients:
I hope this letter finds you well and looking forward to Summer! It’s been several months since my latest correspondence yet many of the same headlines have been driving the economy and markets. Financial markets have performed favorably year to date after a very rough 2022. Looking back just a tad bit further, major indices are at levels today exactly where they were at the end of 2020 into early 2021. Despite these trends, longer-term historical averages remain consistent with averages dating back to the early 1900’s. I think we all know what this means in terms of management of financial assets.
To this point, the economy has digested one of the most aggressive interest rate hiking cycles The Federal Reserve has ever embarked upon. This past week they, after pausing for the first time in this rate hiking cycle, prepared investors for 1-2 further quarter point hikes. Most weren’t expecting this more hawkish tone and don’t believe the Federal Reserve can easily continue hiking after pausing. I say to this point as there is often a lag effect here, where some impact needs approximately 12 months to work its way through the financial system. We have seen progress made on the inflation front, a debt ceiling debate behind us, credit markets remain healthy, we have seen cracks to certain segments of the banking system in 2023, housing has softened as expected, yet unemployment has remained robust. I see the conflicting data presented above, along with a host of other data, presenting investors with continued uncertainty on where things go from here. There is data that would support a bearish outlook, and there is data that supports a bullish outlook. Many economists point to the labor market as a big reason to be more optimistic.
I’ve looked back over several market newsletters I’ve written (going back years and years), and I continue to see my use of the phrase “cautiously optimistic.” I’ve heard this more and more as I listen to technicians and market economists. I’m going to continue to keep this in the front of my mind as it has navigated some very turbulent times over the years and will likely continue to do so.
I’ve read, and heard, so much about whether we are heading into a recession at the hands of The Federal Reserve. Have they done too much tightening, in a short period of time, that our economy can’t withstand. One thing I can say with certainty is that our economy moves in cycles: from expansion, to peak, contraction, to trough. We are going to experience them all in perpetuity. We can’t say exactly where we are on that cycle at any single point in time, but we can assess easily how investment decisions overlap with the general stages of the cycle. Let’s examine the modern day. Most believe we are in a period of contraction (I agree here), and it is unknown if we have seen a trough yet. Whether we have or not is not of major consequence to me. Portfolio decisions are considerably more deliberate (both in terms of time and thought), more emphasis on defense than offense, and quality is key when making investment decisions.
The most fundamental factor driving equity prices is a company’s earnings and profitability. Companies report to Wall Street their earnings each quarter. Analysts adjust their expectations for these reports based on various factors such as economic conditions. As the economy is contracting, analysts scale back earnings expectations, and this can impact stock prices. Through these recent quarters, earnings have proven to be surprisingly resilient. I feel that earnings growth is, if not at, near a trough and expect to see earnings growth resume as we enter the back half of 2023 into 2024. Historically we see stock prices recover in advance of corporate earnings. Based on current conditions, one could view this as a more bullish sign.
As always, I want to stress my availability to discuss this newsletter or any other questions/thoughts you may have. No question or conversation is too small. Feel free to telephone (508-405-0065), email (jhartman@accessfits.com), via my website at www.accessfits.com, or reach out to schedule a meeting in person. I also want to make myself available, at your discretion through any of the means I just mentioned, to anyone (family, friend, work associate, etc.) who you feel may find value in my services.
Kind Regards,
Jeremy M. Hartman
President, Access Financial & Income Tax Services
