The first half of the year was surprising for many investors. The markets saw a return to a pro-growth environment, similar to what occurred coming out of the COVID-19 crisis. This particular market upsweep was viewed as quite narrow, with limited breadth. A narrow market with limited breadth refers to the fact that the bulk of the companies that compose the market index were not significant contributors to the rising market.
A narrow market is often viewed as an unhealthy market. When looking at the returns of the S&P 500 through June 30th, the top 10 contributors provided the vast majority of the return. Most of those names were large-cap technology names, including but not limited to the” magnificent seven”: Nvidia, Meta, Apple, Microsoft, Alpha, Tesla, and Amazon. Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices, had another creative way of putting the first half rally into context. He pointed out that 96.7% of the return of the S&P 500 came from three sectors—information technology, consumer discretionary and communication services.
The good news is that the market has since broadened a bit and given investors reasons to be optimistic. The recent runup in large-cap growth has created a sector that appears to be a bit overheated and leads us to believe that some of the other more stable names in the market (e.g., dividend payers) are due to follow suit. Because of this, our posture remains the same: a minor value tilt (bordering on neutral) with broad diversification across market capitalization as well as sector.
From a macro perspective, investors are facing an onslaught of questions, as is always the case. The recession that began being forecast in early 2022 never materialized. Now, many are questioning if a recession will occur or if the economy will have a soft landing. The economy continues to show signs that it is strong and resilient. Yet, some leading indicators, such as rising initial jobless claims and startup layoffs increasing are pointing to a softening labor market. These indicators appear to be giving signals that a slowdown is on the horizon. A lot of the mixed signals have to do with the messaging coming from the Federal Reserve (we’re going to do everything we can to fight inflation) versus what the markets are forecasting (the Fed will have to cut rates toward the end of the year).
Switching gears to fixed income, for the first time in years, bonds now appear to have some attractive characteristics. Unfortunately, to get to where we are today, a lot of pain had to be experienced in the bond market in the calendar year 2022. As Edward McQuarrie, an investment historian and professor emeritus at Santa Clara University pointed out, with the Bloomberg Barclays US Aggregate Bond Index returning negative 13.0% last year, 2022 was the worst year for broad bond investors in any of our lifetimes. However, as it stands today, with bonds yielding north of 5% on the short end of the curve, the popularity of short-term fixed income instruments has risen dramatically. In addition, with the anticipation that rates may start to drop in 2024, layering in some longer-term bonds no longer seems as risky as it did as recently as a year ago.
While inflation appears to have peaked last year, the Fed just raised rates at their late July meeting and may still raise rates again later this year. What is not in question is that the tightening cycle should be nearing its end in the near future. The debates have now turned to whether a recession will occur. Also, if a recession does occur, the general consensus is that the depth and length of the recession will be much less than was once feared. In summary, the uncertainty that exists in the current market environment is similar to the uncertainty that always exists.
From our vantage point, geopolitical risks are being underpriced, and the implied market probability of the Fed cutting interest rates this year seems to be expected with a misplaced level of confidence. Those underpriced risks are balanced out by the fact that the earnings bear market and the growth slowdown seem like they will not be as severe as once expected and may not even come to fruition in the near future either.
When taking all of the above-mentioned information into account, the risks of being out of the market are greater than the risks of being in the market. This viewpoint holds across asset classes. The objective remains to stay fully invested and looking to do so by investing opportunistically across the equity, fixed income, and alternative asset spectrum in a manner that is consistent with your risk tolerance.
Chief Investment Officer
About Wolf Group Capital Advisors
At Wolf Group Capital Advisors, a comprehensive wealth management firm and Registered Investment Advisor (RIA) based in Fairfax, VA, nothing is more important than the fiduciary responsibility we have in managing your wealth. Taking the utmost care, we focus on providing advice tailored to your specific circumstances. With more than two decades advising U.S. expatriates and non-US citizens employed by international organizations, we are qualified in investment strategies addressing global issues. Empathy and curiosity—combined with our experience in life planning and investment management—enable you to explore a wider set of possibilities that can lead to a fulfilling life you’ve worked hard to attain.
The information presented is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.
Diversification and asset allocation do not ensure a profit or guarantee against loss.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website. Past performance is not a guarantee of future results.