Having just crossed the halfway point of this year, we at Altfest Personal Wealth Management would like to share an update on key influences on the markets and what that means for investors like you during the rest of 2023.

I work as a managing advisor at the firm, and we like to regularly share with our clients and prospects ideas about ways you can navigate both opportunities and risks in the current market. In this post, we look at the state of the economy, market performance so far this year, and how those possibly distant-seeming forces affect your own investments.

 

Economic Overview

First, let’s look at where the economy stands at midyear, as it has such a significant impact on how markets behave and the ways we choose to invest clients’ assets entrusted to us.

The one key metric that’s been top of mind for many investors is inflation. Recently, inflation has been cooling. At the moment, it’s at its lowest level in about two years’ time, which is good. We’re heading in the right direction, which is generally what the financial markets want to see.

The reason why we care so much about inflation is that it’s a key indicator that the Federal Reserve is monitoring closely when they set interest-rate policy. Last year, inflation was much higher, almost double where we’re at today, now in the range of 4% to 5%, so that cooling-off of consumer prices is some indication that the Fed’s fight against inflation, waged with aggressive interest-rate hikes, is being won.

After a short pause in rate increases in June, the Fed returned to increasing them, and the federal fund’s target rate now stands in a range of 5.25% to 5.5%, more than twice what it was a year ago. This all matters because short-term interest rates, as set by the Fed, affect many aspects of investing.

One thing to keep in sight here: Where are interest rates going to be in the future?

The Fed, as represented by the Federal Open Market Committee (FOMC), and the markets believe that rates will be lower going forward. To give you a sense of a prediction, as of now, we’re a little over 5%. The market believes we’ll be slightly higher than that by year-end. But then, over the next two years, we could see interest rates coming down — even to close to the 3% to 4% range by 2025.

The level of interest rates can determine anything from whether you should take out an adjustable-rate mortgage (ARM) when buying a new house to whether you should invest in shorter-term certificates of deposit (CD) or seek out certain kinds of investments that benefit from easing prices and rates.

For example, this is type of thinking important when it comes to building a portfolio — specifically the bond portion of one. You have to make judgment calls on whether to buy shorter- or longer-term bonds. We believe there’s a place for longer bonds in the portfolio, especially because, at present, interest rates are pretty attractive for both shorter- and longer-term bonds, and locking in that higher rate for an extended duration can be a very nice thing.

Also, somewhat surprisingly, corporate profits have been fairly strong so far this year. So that’s another bright spot for the stock market, specifically.

Meanwhile, growth in the economy has been slowing. In the first quarter, gross domestic product (GDP) came in at around 2%, after being closer to 6% at the end of last year. There are, in our opinion, some risks related to economic growth and the fact that banks may not be lending as much as they were earlier.

But, despite that, there are investment opportunities to be had, given the stronger profit growth and, in some cases, reasonable asset valuations in the market. We want to emphasize that there are pockets of opportunity investors can take advantage of right now.

When it comes to the stock market, we like to look at where valuations stand. Currently, they are above average on most metrics. Price-to-earnings (P/E) ratio is one main indicator we look at: We’re somewhat above the 25-year average for the price-to-earnings ratio at present. Most other valuation metrics are also a little above average, and this to us means that one needs to be a little bit more careful about investing in the U.S. stock market. It doesn’t mean you shouldn’t be investing here, in a diversified portfolio, but one should be aware that, at the moment, stock valuations are a bit above average.

 

Market Performance So Far This Year

In this stock market performance chart through June 30 below, the top purple line is the Nasdaq, which comprises many technology stocks, a lot of which you’re very familiar with, like Apple, Google, Facebook, etc. These have performed extremely well year-to-date — actually, most of their 12-month return has occurred in that recent six- or seven-month period. There’s been a lot of enthusiasm around artificial intelligence (AI), leading to strong performance for many large-capitalization growth stocks like the technology names I just mentioned.

Benchmark Stock Market Indexes (Trailing 12 Months)

However, most markets’ indexes are somewhere in between, up close to 15% to 20% over the last 12 months. A key lagger is emerging market stocks, shown by the bottom green line in the chart above.

Within the U.S. stock market, we have a wide dispersion of valuations. The valuation spread, the difference between more-expensive stocks and less-expensive stocks, has widened considerably since the pandemic, and it’s continued to stay rather wide. Meaning the more expensive, typically higher-growth stocks that have faster-growing revenue are trading at a more costly level than usual compared with more value-oriented stocks that may be paying a dividend and are in less-fast-growing industries.

We think it’s an important time to be selective with investing; in other words, you shouldn’t necessarily just buy the whole market. You, instead, should be careful about how you’re investing, especially within the U.S. market.

We also believe international investing has a key role in a diversified portfolio. These markets shouldn’t be ignored despite lackluster recent returns. They tend to outperform when U.S. index returns are less than 6%.

Assessing bonds, or fixed income, you can get a pretty good yield on shorter-term U.S. Treasurys, for instance, somewhere close to 5% as of midyear. With longer-term Treasurys, like a 30-year Treasury bond, you get around a percentage point lower, about 3.8%, as of midyear. As you may have read, right now, we’re in what’s called an inverted yield curve, so you actually get paid less annually for a longer-term bond than a short-term bond.

In addition, we think diversification within mortgage-backed bonds and inflation-protected bonds is also important. We’re less optimistic on corporate bonds, so you don’t see them too much in the diversified portfolios we manage and offer clients.

 

Looking Ahead

So, in summary, we’re at an uncertain period right now. Higher interest rates married with high inflation. We don’t know exactly when we might be seeing the next recession, but it could be soon. This is coming at a time when stocks have performed relatively well this year, mostly driven by large technology stocks.

So, as investors, we think you should be careful right now. We see global diversification as being as critical as ever, and that may mean taking risks where appropriate.

 

Find Out More

At Altfest, we’re always ready to help you find the most suitable ways to arm your portfolio to weather current economic and market storms. We realize everyone’s situation is unique, so reach out to our firm with any investment questions we can address. Altfest advisors are ready to evaluate your circumstances and offer ideas on how to tease out the full potential of your portfolio.

If you’re not yet an Altfest client, please book some time for a complimentary consultation.

 

Investment advisory services provided by Altfest Personal Wealth Management (“APWM”). All written content on this site is for information purposes only. Opinions expressed herein are solely those of APWM, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to another parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. All investing involves risk, including the potential for loss of principal. There is no guarantee that any investment plan or strategy will be successful.