Pause, evaluate and pivot

Midway through 2023 – It’s a good time to pause, evaluate and pivot.

We are at the mid-way through 2023, and this is a good time to reflect on what has happened the past 6 months. If you’re an avid watcher of CNBC and other business news, they were preaching to sell everything ahead of the recession, but the S&P is up 17% given a higher interest rate environment. 

We aren’t certified investment professionals, but if you had a diversified portfolio, you would have experienced a nice gain to start 2023. If you missed out, it’s okay – there’s always a market for you.

Why the surge through the first half of 2023? A few points to highlight

• We started seeing corporations tighten the belt last year with cost controls, such as staff reductions, turning up efficiencies in operating and borrowing expenses, thus leading to good earnings so far

  • S&P 500 companies earned on average 11.1% vs 8.6% – We are growing! This is great for your portfolio and longer term investments such as your 401k.

• The pace of inflation has cooled off a bit. Overall inflation has decreased 11 months in a row and down by 5.1 percentage points from its peak last year of 9.1 percent. However, we are still seeing nagging inflation across the board

  • Has anything beside eggs gone down in pricing?

• PE for the stock market has been between 18-19, and is currently around 16.5, which means we are cheap compared to historical averages. The earnings expansion mentioned above has a lot to do with that

While we don’t have a crystal ball to predict which way things will go, having a diversified portfolio is your best approach. <Read our tips on a diversified portfolio here>. Regardless of which way things go, having exposure to many different asset classes will ensure you have the right risk/reward ratio.

There are few things to keep in mind:

• Housing prices are still strong. Zillow recently announced that the price for homes are only down $4,000 on average off record pricing. Not a huge difference. Additionally when it comes to buying, interest rates between 7-8% seem to be the new norm. There also seems to be consumers with a lot of liquidity leading to 40% of home buyers today buying without a mortgage and in cash. 

• Inflation is still hanging around. While the Federal Reserve is aiming for a 2% terminal rate, to get to this point from where we are today can take a number of years. In the past, it has taken a number of years from its peak to stabilize and ultimately come down. It is expected that with further rate increases, it will take a number of years before we can even see 2% again, making things more unstable in the coming quarters.

• Is Covid really gone? While the President has formally declared the end of both the COVID-19 public health emergency and the national state of emergency, given the seasonal resurgence and ongoing boosters, safe to say COVID really isn’t gone. Something to keep on the radar in developing countries and those that can have a global economic impact around the world such as China.

• The Ukraine situation is something to watch. China and Taiwan have something similar brewing. Global situations tend to have a ripple effect on markets. 

It is impossible to say for sure what the future holds for the stock market. However, based on the current economic and market conditions, there are a few possible scenarios.

• One scenario is that the market continues to rise. If corporate earnings continue to grow and inflation moderates, the stock market could continue to reach new highs. 

• Another scenario is that the market experiences a correction. A correction is a temporary decline in the stock market, usually of 10% or more. Corrections can happen for a variety of reasons, such as a sharp increase in interest rates or a major economic event.

• A third scenario is that the market enters a bear market. A bear market is a prolonged decline in the stock market, usually of 20% or more. Bear markets can be caused by a variety of factors, such as a recession or a financial crisis.

It is important to remember that the stock market is volatile and that there is always the possibility of losses. If you are investing in the stock market, it is important to do your research and understand the risks involved whether they are macro environmental factors or economic.