FINANCIALLY FOCUSED

August 2023 Newsletter

Market Update
August 2023

Stocks have mostly ignored concerns over persistent inflation, high interest rates, and potential for recession in the first half of 2023. The S&P 500¹ and Nasdaq Composite² have risen double digits year to date. Recent bank earnings suggest credit market instability is contained, but assuming we are out of the woods would not be prudent just yet. The Federal Reserve did not increase the Fed Funds rate at the most recent meeting, but the board of governors continued their hawkish tone. The Fed has pressed on with a reduction in balance sheet assets³ that have built up since 2020. This is another form of economic tightening that does not get as much attention as interest rates. By reducing the amount of cash in the banking system, banks have less reserves, resulting in lower liquidity and less lending to businesses and individuals.

Looking across the globe, developed markets are in different stages of their economic cycles. The US is in the late stages of interest rates hikes, whereas Europe is still projected to increase rates this year and next. Within your equity allocation, this tells us you want to overweight US growth equities and lean towards international value versus growth. A benefit to international value versus US growth is yield and a track record of dependable fundamentals. In general, growth companies do not provide much income from share ownership, and US value has struggled this year. Therefore, international value exposure can provide some income and potentially less volatility in the near term.

The technology sector has been the market leader in 2023 by a longshot. Roughly seven⁴ stocks have carried the S&P 500 to double digit gains this year. We have reached the ‘show me’ phase of the tech rally. Earnings growth needs to happen in the tech sector to support these price levels. The price to earnings ratio of the S&P 500 is still above the long run average⁵. However, the aforementioned seven stocks are creating the frothy index p/e ratio. If you remove the seven stocks, valuations look much better. Interestingly, if you reweight the S&P 500 constituents equally, the year-to-date return is less than half of the actual index return. This leads us to recommend a broadening of equity exposure, reducing any overweight technology stocks and moving into other sectors via individual equities or a diversified index fund. Our focus is on quality fundamentals and companies that consistently and increasingly return value to shareholders.

Fixed income market pricing has stabilized and the opportunity to add duration is still available. Longer duration bonds have become less sensitive to interest rate moves, reducing the risk of price instability. The expectation remains that rates will stay higher for longer. Due to lower price sensitivity, you can add duration to your bond portfolio, capture these higher yields, and be ready when rates decrease. Adding intermediate term core treasury and investment grade bonds as well as floating rate bonds are examples of how we are capturing this trend.

Often talked about during times of uncertainty are alternative investments. Alternatives can provide low correlation and low beta to public markets, diversifying your portfolio. A good alternative also provides defense, limiting downside during equity downturns. The full picture isn’t complete without performance of course. An alternative should provide consistent performance over the long term, regardless of economic cycle. There are multiple ways to invest in alternatives via publicly traded funds and private funds. Some are liquid, some are not, and we can guide you on how these investments fit into your portfolio.

¹https://fred.stlouisfed.org/series/SP500
²https://fred.stlouisfed.org/series/NASDAQCOM#0
³https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm
⁴AAPL,META,NVDA,TSLA,MSFT,GOOGL,AMZN,GOOG/GOOGL
⁵https://www.multpl.com/s-p-500-pe-ratio

Don’t Underestimate these Retirement Expenses

As you head toward retirement and your excitement grows, don’t forget to consider your likely retirement expenses. An AARP article, 10 Biggest Expenses in Retirement, has some interesting information about retirement expenses.
 

Read More

Sheet Pan Chicken Fajitas
 

Making a whole recipe on one sheet pan is perfect for meal prepping. For these fajitas you simply toss all of the ingredients—chicken and vegetables—in an easy marinade of avocado oil and taco spices like cumin and chili powder and then bake it all together on a sheet pan.

Get Cooking!

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Investment advisory services offered through Alternative Investment Advisors, LLC. (AIA), an SEC Registered Investment Advisor. AIA and its advisors do not render tax, legal or accounting advice. Fixed insurance products and services are offered through Swenson Wealth Management. Swenson Wealth Management is not a registered investment advisor and is not a subsidiary or affiliate of Alternative Investment Advisors, LLC. Swenson Wealth Management and their individually licensed and appointed insurance agents, and AIA are not affiliated with or endorsed by the Social Security Administration or any government agency.

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