Transcript:
So far 2023 has been a pretty good year all told we've seen a resurgence in both equities and fixed income. So both are positive this year, which obviously after last year is nice to see. But I think as we moved into the midpoint here in 2023, you know, there's a couple of things that we're looking at that concern us just from the overall market levels. And I think, you know, right now, the biggest thing we're seeing is kind of the inconsistency between the economic data expectations for fed cuts later this year, and a stock market that seems to be doing quite well, though, is narrowed into just a handful of very large cap higher quality names. So I think as we move through the year, we're gonna see how that progresses. But right now, the kind of incongruency is definitely alarming to us in terms of where stocks are priced, what's expected for the economy, and maybe what the Federal Reserve ends up having to do.
Market Headwinds
More recently, a lot of concerns in the marketplace are hovering around the debt ceiling and the debate that's ongoing, we're getting very close to, you know, what Treasury Secretary Yellen has put as the X date out there for when the Treasury is going to run out of money. But we definitely think that it's likely that there is a resolution, I think both sides will come to the point that they make it happen. So overall, it could be a situation where everyone's looking at the debt ceiling as a negative event that ends positively. But from a market point of view, that actually might be negative for equities, as they have already kind of priced in a pretty good scenario. Looking at what the Federal Reserve might be looking to do the rest of the year, I think there's been a pretty solid consensus that, you know, they're very close to or either at the end of their interest rate hiking campaign or very close, maybe one more hike away. I don't believe that's really the market's expectation and keep looking at the expectations that the market has is that they're going to be cutting interest rates later in this year. Again, that dynamic is, again, not, you know, very logical to us where the fixed income markets are believing the Feds going to be cutting interest rates at the back half of this year, you know, in the equity market, saying that, well, that doesn't matter if we believe that's going to be a much higher likelihood of recession would cause that to happen. And earnings growth would obviously be declining. So it's a weird dynamic where the market believes the Fed is done, could possibly be cutting interest rates by the back half of this year, and is not going to impact growth expectations.
Market Performance
When we look at S&P 500 performance or just the broad US equity performance, it has narrowed quite extensively into a very small set of very large growth technology, com services stocks, much like what we saw, you know, through the end of 2019, and through 2021, where he saw a lot of those stocks continued to be priced quite well. But underneath the surface, a lot of the more cyclical areas of the market are not doing as well. You know, small cap stocks have continued to struggle, even post banking crisis, the regional banks are still not back on their feet. A lot of those equity prices are lower than what they were back in March. And so we're seeing, you know, not necessarily the healthiest market underneath when you're looking at that breadth narrow until a handful of names are seeing the S&P 500 at quite stretched valuations relative to what we've seen in history. So certainly, you know, we'll take those nice, solid positive numbers, but there are some concerning points when you look at what it means for the markets moving forward. When we look at earnings versus the economy, it's definitely telling a different story. I think a lot of expectations now from consensus estimates are that earnings have bottomed, I think probably had maybe more positive economic data that happened earlier this year consumer that's remained remaining quite strong, that's probably prolonged the cycle a little bit longer. So you have this dynamic of is the bottom in volumes, is it not? I think when we look at the economic data, we continue to see it sliding more negatively. The leading economic index was negative for the 13th month in a row. Looking at a lot of the regional Fed surveys from the regional manufacturing data, again, quite negative, consumer confidence is drifting lower. So we do think that the consumer is starting to become more and more impacted by the length in which we've seen inflation going on. Overall, the economic data continues to slow outside of really the labor markets, labor markets have continued to show pretty good strength. We're obviously at a 30 year look record low in terms of overall unemployment. We have seen unemployment, weekly numbers start to drift up, although it's not alarmingly. So really this dynamic of a hot labor market at least can take a long time to slow down with a very rapidly slowing overall economic picture. You just take overall expectations for Q2 GDP growth, we're at about 1.9% came in about 1.1%. So you're still running at a pretty weak overall GDP rate. And we continue to see some concerning impact indicators from all the incoming economic data that are not turning back up positively not seeing much of a sign from, let's say, more cyclical are things like oil prices, small caps, any of those things are not turning around to really kind of tell you that kind of a turning point higher or inflection higher and any of that data is on the way.
Outlook
Looking at the equity market moving forward, we continue to stress quality, I know the market has narrowed into some higher quality areas. But that's an area where we definitely think you want to make sure you have high quality businesses with durable business models, as we do anticipate you will get into a recession later this year into 24. So certainly the time for taking kind of undue risks and really kind of caution to the Windows isn't is no longer there. So certainly, we think that you want to be slowing but again, up in quality, generally, kind of the larger cap areas that you want to be focused in on small caps obviously struggle in a recessionary environment or economic slowdown, we've been seeing that. So we definitely think it's a continuation of where these higher quality names are really going to be the way you want to lead out. They don't through the rest of the year and kind of play. You know what may be ahead of us in the rest of 23? Yeah, one of the most positive areas that we continue to see is in the fixed income markets, bond yields obviously, repriced quite a bit higher from last year. So we are seeing attractive yield levels, you don't have to take a lot of risk anymore. In the overall markets to get a good return, you can get five plus percent on high grade corporates. But the corporate bond market is a lot like what we're seeing in the equity market, where you're not necessarily seeing a lot of respect for a recession coming down, corporate spreads are quite low. So you'd like to see those widen out as investors become a little bit more concerned. So more recently, we've taken opportunities to again, thin out some of the lower credit quality exposure we have, again, only in investment grade sides, we've moved, you know, incrementally away from triple B's into higher A+ type rated paper. And then also mortgages continue to be an area that got hit hard last year. Those spreads are actually quite wide given what's going on in the mortgage market and versus treasuries. So versus corporates, we do like mortgages right now. But they're gonna get increasing credit quality and looking for those areas that are offering you know, unique spread level opportunities to invest in a do keep the higher quality good yield, and not have to take a lot of risks. So we continue to favor the fixed income markets a little bit more than the equity markets at this time given our economic outlook.