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Quarterly Insights – July 2023

July 14, 2023 by Patricia Jennerjohn CFP®, MBA

Declining Inflation and Resilient Growth Push Stocks Higher in Q2

The S&P 500 ended the second quarter and first half of 2023 at a 14-month high and most major stock indices logged solid gains in the second quarter following a pause in the Fed’s rate hike campaign, stronger-than-expected corporate earnings (especially in the tech sector) and the relatively drama-free resolution of the debt ceiling.

The second quarter began with markets still in the throes of the regional bank crisis following the March failures of Silicon Valley Bank and Signature Bank, and investors started the month of April wary of contagion risks. Those concerns proved mostly overdone, however, as throughout most of the month regional banks were stable. That stability allowed investors to re-focus on corporate earnings, and the results were much better than feared as 78% of S&P 500 companies reported better-than-expected Q1 earnings, a number solidly above the 66% long-term average. Additionally, 75% of reporting companies beat revenue estimates for the first quarter, also well above the long-term average. That solid corporate performance was a welcome sight for investors and coupled with general macroeconomic calm, allowed stocks to drift steadily higher throughout most of April. However, following an underwhelming earnings report, concerns about the solvency of First Republic Bank weighed on markets late in the month and the S&P 500 declined into the end of April to finish with a modest gain.

Fears of a First Republic Bank failure were realized on May 1st, as the bank was seized by regulators and the FDIC was appointed its receiver. However, that same day, JPMorgan announced it was acquiring the bank from the FDIC, and that move helped to calm investor anxiety about financial contagion risks. The Federal Reserve also helped to distract investors from the First Republic failure, as the Fed hiked rates at the May 2nd FOMC meeting, but importantly altered language in the statement to imply it would pause rate hikes at the next meeting. That change was expected by investors, however, and as such it failed to ignite a meaningful rally in stocks. Instead, the tech sector helped push the S&P 500 higher in mid-May, thanks to an explosion of investor and financial media enthusiasm around Artificial Intelligence (AI), which was highlighted by a massive rally in Nvidia (NVDA) following a strong earnings report. However, like in April, the end of the month saw an increase in volatility. This time it was thanks to the lack of progress on a U.S. debt ceiling extension and rising fears of a debt ceiling breach and possible U.S. debt default. However, a two-year debt ceiling extension was agreed to by Speaker McCarthy and President Biden on May 28th and was signed into law a few days later, avoiding a financial calamity. The S&P 500 finished May with a slight gain.

With the debt ceiling resolved, a Fed pause in rate hikes expected and continued stability in regional banks, the rally in stocks resumed in early June and was aided by several potentially positive developments. First, inflation declined as the Consumer Price Index (CPI) hit the lowest level in two years. Second, economic data remained impressively resilient, reducing fears of a near-term recession. Finally, in mid-June, the Federal Reserve confirmed market expectations by pausing rate hikes and that helped fuel a broad rally in stocks that saw the S&P 500 move through 4,400 and hit the highest levels since April 2022. The last two weeks of the month saw some consolidation of that rally thanks to mixed economic data, political turmoil in Russia and hawkish rhetoric from global central bankers, but the S&P 500 still finished June with strong gains.

In sum, markets were impressively resilient in the second quarter and throughout the first half of 2023, as better-than-feared earnings, expectations for less-aggressive central bank rate hikes, more evidence of a “soft” economic landing and relative stability in the regional banks pushed the S&P 500 to a 14-month high.    

Second Quarter Performance Review

The second quarter of 2023 saw an acceleration of the tech sector outperformance witnessed in the first quarter, as “AI” enthusiasm drove several mega-cap tech stocks sharply higher. Those strong gains resulted in large rallies in the tech-focused Nasdaq and, to a lesser extent, the S&P 500 as the tech sector is the largest weighted sector in that index. Also like in the first quarter, the less-tech-focused Russell 2000 and Dow Industrials logged more modest, but still solidly positive, quarterly returns. 

By market capitalization, large caps outperformed small caps, as they did in the first quarter of 2023. Regional bank concerns and higher interest rates still weighed on small caps as smaller companies are historically more dependent on financing to maintain operations and fuel growth.

From an investment style standpoint, growth handily outperformed value again in the second quarter, continuing the sharp reversal from 2022. Tech-heavy growth funds benefited from the aforementioned “AI” enthusiasm. Value funds, which have larger weightings towards financials and industrials, relatively underperformed growth funds, as the performance of non-tech sectors more reflected the broad economic reality of mostly stable, but unspectacular, economic growth.

On a sector level, eight of the 11 S&P 500 sectors finished the second quarter with positive returns. As was the case in the first quarter, the Consumer Discretionary, Technology, and Communication Services sectors were the best performers for the quarter. The surge in many mega-cap tech stocks such as Amazon (AMZN), Apple (AAPL), Alphabet (GOOGL), Meta Platforms (META), and Nvidia (NVDA) drove the gains in those three sectors, and they handily outperformed the remaining eight S&P 500 sectors. Industrials, Financials, and Materials saw moderate gains over the past three months, thanks to rising optimism regarding a “soft” economic landing.  

Turning to the laggards, traditional defensive sectors such as Consumer Staples and Utilities declined slightly over the past three months, as resilient economic data caused investors to rotate to sectors that would benefit from stronger than expected economic growth.  Energy also posted a slightly negative return for the second quarter, thanks to weakness in oil prices. 

US Equity IndexesQ2 Return YTD
S&P 50010.32%16.89%
DJ Industrial Average5.28%4.94%
NASDAQ 100 17.33%39.35%
S&P MidCap 4006.70%8.84%
Russell 20007.24%8.09%
Source: YCharts

Internationally, foreign markets lagged the S&P 500 thanks mostly to the relative lack of large-cap “AI” exposed stocks in major foreign indices, combined with some late-quarter worries about the EU economy and pace of Bank of England rate hikes, although foreign markets did finish the second quarter with a modestly positive return. Foreign developed markets outperformed emerging markets thanks to a lack of significant economic stimulus in China, which weighed on emerging markets late in the quarter.  

International Equity IndexesQ2 Return YTD
MSCI EAFE TR USD (Foreign Developed)3.63%12.13%
MSCI EM TR USD (Emerging Markets)1.50%5.10%
MSCI ACWI Ex USA TR USD (Foreign Dev & EM)3.13%9.86%
Source: YCharts

Commodities saw modest losses in the second quarter as most major commodities declined over the past three months. Oil prices witnessed a moderate drop despite a surprise production cut from Saudi Arabia and an increase in geopolitical tensions in Russia, as concerns about future economic growth and oversupply weighed on oil. Gold, meanwhile, posted a modestly negative return as inflation declined while the dollar failed to meaningfully drop.  

Commodity IndexesQ2 Return YTD
S&P GSCI (Broad-Based Commodities)-1.45%-7.54%
S&P GSCI Crude Oil-5.21%-12.40%
GLD Gold Price-3.08%5.23%
Source: YCharts/Koyfin.com

Switching to fixed-income markets, the leading benchmark for bonds (Bloomberg Barclays US Aggregate Bond Index) realized a slightly negative return for the second quarter of 2023, as the resilient economy and hope of a near-term end to Fed rate hikes led investors to embrace riskier assets.   

Looking deeper into the fixed-income markets, shorter-duration bonds outperformed those with longer durations in the second quarter, as bond investors priced in a near-term end to the Fed’s rate hike campaign, while optimism regarding economic growth caused investors to rotate out of the safety of longer-dated fixed income.

Turning to the corporate bond market, lower-quality, but higher-yielding “junk” bonds rose modestly in the second quarter while higher-rated, investment-grade debt logged only a slight gain. That performance gap reflected investor optimism on the economy, which led to taking more risk in exchange for a higher return.  

US Bond IndexesQ2 Return YTD
BBgBarc US Agg Bond-0.38%2.09%
BBgBarc US T-Bill 1-3 Mon1.23%2.33%
ICE US T-Bond 7-10 Year-1.32%1.62%
BBgBarc US MBS (Mortgage-backed)-0.41%1.87%
BBgBarc Municipal0.04%2.67%
BBgBarc US Corporate Invest Grade0.40%3.21%
BBgBarc US Corporate High Yield2.60%5.38%
Source: YCharts

Third Quarter Market Outlook

As we begin the third quarter of 2023, the outlook for stocks and bonds is arguably the most positive it’s been since late 2021, as inflation hit a two-year low, economic growth and the labor market remain impressively resilient, the Fed has temporarily paused its historic rate hiking campaign, the debt ceiling extension is resolved, and we’ve seen no significant contagion from the regional bank failures from earlier this year.

That improvement in the fundamental outlook has been reflected in both stock and bond prices so far this year, as the S&P 500 hit the best levels since last April and more cyclically focused sectors led markets higher late in the quarter on rising hopes for a broad economic expansion.  

However, while clearly the past quarter brought positive developments in the economy and the markets, leading the financial media to proclaim a “new bull market” has started, it’s important to remember that potentially significant risks remain to the economy and markets. Put more bluntly, the market has taken a decidedly positive view on the ultimate resolution of multiple macroeconomic unknowns, but their outcomes remain very uncertain and thanks to the strong year-to-date rally in stocks, there is now little room for disappointment.

First, the economy has not yet felt the full impact of the Fed’s historically aggressive hike campaign, and while the economy has proved surprisingly resilient so far, we know from history that the impacts of rate hikes can take far longer than most expect to impact economic growth. Put in plain language, it’s premature to think the economy is “in the clear” from recession risks, and we should all expect the economy to slow more as we move into the second half of 2023. The key for markets will be the intensity of that slowing, as at these valuation levels stocks are not pricing in a significant economic slowdown.  

On inflation, clearly there’s been progress in bringing inflation down, as year-over-year CPI has fallen from over 9% in 2022 to 4% in less than a year’s time. However, even at 4%, CPI remains far above the Fed’s 2% target. If inflation bounces back, or fails to continue to decline, then the Fed could easily hike rates further, like the Bank of Canada and Reserve Bank of Australia did in the second quarter, following pauses of their own. Those higher rates would weigh further on economic growth.  

Turning to banks, markets have taken the regional bank failures in stride, as the collapse of First Republic Bank caused minimal volatility in the second quarter. However, it’s likely premature to consider the crisis “over” and at a minimum, reduced lending by regional banks poses an additional threat to the commercial real estate market and small businesses more broadly. Bottom line, measures taken by the Fed in March have “ringfenced” the regional bank stress for now, but this remains a risk to the economy.

Finally, markets are trading at their highest valuation in over a year, and investor sentiment has turned suddenly, and intensely, optimistic. The CNN Fear/Greed Index ended the second quarter at “Extreme Greed” levels, while the American Association for Individual Investors (AAII) Bullish/Bearish Sentiment Index hit the most bullish level since November 2021, right before the market collapse started in early 2022. Positive sentiment does not automatically mean markets will decline, but the sudden burst of enthusiasm needs to be considered in the context of what is a still uncertain macroeconomic environment and markets no longer have the protection of low expectations and valuations to cushion declines.  

In sum, clearly there have been positive macro developments so far in 2023 that have helped the stock market rebound. However, it’s important to remember that multiple and varied risks remain for the economy and markets.  

Filed Under: Focused Finances Blog, Investments, Market Commentary

What the Fed’s Hawkish Pause Means for Long-Term Investors

June 21, 2023 by Patricia Jennerjohn CFP®, MBA

At its June meeting, the Fed decided to hit pause on rate hikes after more than a year of rapid monetary policy tightening. Since last March, the Fed has raised rates 10 times from zero to 5%, making this the second-fastest rate hike cycle in history. However, some consider the Fed’s latest decision to be a “hawkish pause” since policymakers have penciled in two additional rate hikes later this year. With interest rates expected to remain higher for longer, what do long-term investors need to know to stay focused on their financial goals?

The Fed expects to raise rates again after skipping June

Federal Funds Rate graph

Perhaps the simplest way to understand the Fed’s latest move is that it is consistent with a slower pace of rate hikes, rather than a complete shift in policy. Since last December, the Fed has steadily decreased the size of each rate hike from 75 basis points (i.e., 0.75%), to 50 bps, to 25 bps, and now possibly to 25 bps every other meeting. At his latest press conference, Fed Chair Powell even inadvertently referred to the June decision as a “skip,” which implies they could raise again in July.

The Fed believes it is reaching a level of interest rates that is restrictive enough to slow inflation. Last week’s Consumer Price Index report, for instance, shows that overall inflation has decelerated to “only” 4% on a year-over-year basis, a significant improvement from the 9.1% pace experienced a year ago. Over this period, gasoline prices have fallen 19.7%, overall energy prices by 11.7%, and the prices of used cars and trucks have declined 4.2%. Other measures of inflation such as the Producer Price Index, also released last week, have made even more progress with the headline index rising only 1.1% year-over-year.

Why might the Fed keep rates high if inflation is already improving? The real challenge facing policymakers continues to be “core inflation,” a concept that excludes food and energy prices to better understand underlying inflation trends. From an economic perspective, inflation that is “sticky” or that threatens an inflationary spiral – i.e., when higher prices result in higher wages, which in turn result in more spending and even higher prices – is the real culprit. Since this depends on the behavior and activities of businesses and consumers, it will take time to improve.

Consumer prices are rising at a slower pace but core inflation remains a problem

Consumer Price Index Components graph

For example, core inflation rose 5.3% in May compared to a year earlier – an improvement from its peak of 6.6% last September but still well above the Fed’s target. The main driver is the cost of housing, referred to as “Shelter” in the CPI report, which has increased 8% over this period and represents a third of the CPI index. Shelter consists of rent payments and what is known as “owners’ equivalent rent,” or what a homeowner would pay to rent their property. While there are signs and hopes that shelter costs will decelerate as leases are renewed, this might only slowly appear in the inflation data. Excluding shelter from core inflation, prices have risen 3.4%.

Of course, higher rates have slowed some parts of the economy, most notably in the financial and real estate sectors. Fortunately, the banking crisis that began in March appears to be stable for the time being, and has arguably benefited banks with strong balance sheets. The jump in the Fed’s own balance sheet in the aftermath of Silicon Valley Bank’s collapse, due to programs such as the Bank Term Funding Program, has already reversed. Residential real estate continues to struggle with the average 30-year fixed mortgage rate around 7%, but there are some signs that housing activity, including existing home sales, is stabilizing. Commercial real estate remains the biggest wildcard as refinancing uncertainty continues.

In contrast, many parts of the economy remain unusually strong given the level of policy rates, allowing the Fed to continue raising at a slower pace. Unemployment is still exceptionally low and the FOMC’s latest projections show that they expect it to rise to only 4.1% by year end. The stock market has also taken recent events in stride with the S&P 500 climbing 15% this year, driven largely by technology stocks. The index has risen 23% since the bottom last fall and is now only 8% below its all-time high achieved at the beginning of 2022.

Global policy rates remain high after a year of tightening

Global Central Bank Policy Rates

It’s worth noting that not all central banks are following the Fed’s lead. For instance, the European Central Bank decided to raise rates just a day after the Fed’s decision to pause. Unlike in the U.S. where economic growth has remained surprisingly robust and inflation has slowed, Europe is experiencing a recession after two quarters of negative growth. Eurozone inflation remains stubbornly high with the headline and core measures rising 6.1% and 6.9% year-over-year in May, respectively. Similarly, the Bank of England’s Bank Rate is currently 4.5% but markets expect a peak rate of 5.5%.

The bottom line? The Fed skipped a rate hike in June due to improving inflation but could raise rates again later this year. Either way, rates will likely remain higher for longer, especially as other central banks continue to tighten policy. Investors should continue to focus on their long-term financial goals as Fed policy evolves.


All written content is for information purposes only. Opinions expressed therein are solely those of Patricia Jennerjohn, Managing Partner, Focused Finances LLC. Material presented is believed to be from reliable resources and no representations are made as to its accuracy or completeness. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Fee only financial planning and investment advisory services are offered through Focused Finances LLC, a registered investment advisory firm in the state of California.

Copyright (c) 2023 Clearnomics, Inc. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via http://www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company’s stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security–including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

Filed Under: Focused Finances Blog, Investments

Quarterly Insights – April 2023

April 13, 2023 by Patricia Jennerjohn CFP®, MBA

Markets Show Resilience to Start 2023

The S&P 500 ended the first quarter of 2023 with a solid gain as hopes for an economic “soft landing” and the Fed signaling that their historic rate hike campaign is coming to an end helped offset two rate increases and the biggest bank failures since the financial crisis.

Markets started 2023 with strong gains in January, which were primarily driven by a continued decline in widely followed inflation indicators. That decline in price pressures was coupled with surprisingly resilient economic data, especially in the labor market. Those forces combined to increase investors’ hopes that the Fed could deliver an economic soft landing, whereby the economy slows but avoids a painful recession while inflation moves close to the Fed’s target. Additionally, corporate earnings for the fourth quarter of 2022, which were reported in January, were “better than feared” and the resilient nature of corporate America contributed to the growing hope that both an economic and earnings recession could be avoided. The S&P 500 posted strong gains in the month of January, rising more than 6%.    

In February, growing optimism for an economic soft landing was delivered a setback, however, as economic data implied a still very tight labor market while the decline in inflation stalled. The January jobs report, released in early February, showed a massive gain in jobs, implying that the labor market will remain extremely tight (something the Fed believes is contributing to inflation). Later in the month, widely followed inflation metrics such as CPI and the Core PCE Price Index showed minimal further price declines, implying that the drop in inflation that had powered the gains in stocks was ending. The strong economic data and a leveling off of inflation metrics led investors to price in substantially higher interest rates in the coming months, and that weighed on both stocks and bonds in February. The S&P 500 finished with a modest loss on the month, falling just over 2%.

The final month of the first quarter began with investors still focused on inflation and potential interest rate hikes, but the sudden failure of Silicon Valley Bank, at the time the 16th largest bank in the United States, shifted investor focus to a potentially growing banking crisis. Signature Bank of New York failed just days later, and concerns about a regional banking crisis surged. In response, the Federal Reserve and the Treasury Department created new lending programs aimed at shoring up regional banks and preventing bank runs but concerns about the health of the financial system persisted and those fears weighed on markets through the middle of March. However, while the Federal Reserve hiked interest rates again at the March meeting, policy makers signaled that they are very close to ending the current rate hike campaign. That admission, combined with no additional large bank failures, eased concerns about a growing banking crisis, and the S&P 500 was able to rally during the final two weeks of March to finish the month with a small gain.

In sum, markets were impressively resilient in the first quarter as a looming end to rate hikes, further declines in inflation and quick and effective actions by government officials in response to regional bank failures helped shore up confidence in the banking system. Stocks and bonds both logged modest gains in Q1, despite the threat of a regional banking crisis and still-elevated market volatility.  

First Quarter Performance Review

The first quarter of 2023 saw a sharp reversal in index and sector performance compared to 2022. On an index level, the Nasdaq (which badly underperformed in 2022) handily outperformed in the first quarter and finished with very impressive returns. That outperformance was driven by a decline in bond yields (which makes growth-oriented tech and consumer companies more attractive to investors) and as mega-cap tech companies such as Apple, Alphabet, Amazon and others were viewed as “safe havens” amidst the late-quarter banking stress. The S&P 500, with its heavy weighting to tech, finished the quarter with a solidly positive return while the Dow Industrials and Russell 2000 logged more modest, but still positive returns through the first three months of the year.

By market capitalization, large caps outperformed small caps, as they did throughout 2022. Concerns about funding sources, should the banking crisis worsen, and higher interest rates weighed on small caps as smaller companies are historically more dependent on financing to maintain operations and fuel growth.   

From an investment style standpoint, growth handily outperformed value which is a sharp reversal from 2022. Tech-heavy growth funds benefited from the aforementioned decline in bond yields and a late-quarter “flight to safety” amidst the regional banking crisis. Value funds, which have larger weightings towards financials, were weighed down by concerns about a potential broader banking crisis.

On a sector level, seven of the 11 S&P 500 sectors finished the first quarter with a positive return. Notably, the three top performers from the first quarter were the three worst performing sectors in 2022. Communication services was one of the best performing sectors in the first quarter thanks to strong gains from internet-focused tech stocks, as lower rates and the rotation to mega-cap tech companies pushed the sector higher. The technology sector also clearly benefitted from those two trends, as it rose slightly more than the communications sector in Q1. Finally, consumer discretionary, which has larger weightings towards tech-based consumer companies such as Amazon and others, also logged a solidly positive gain thanks to the same general tech stock outperformance and as the labor market remained more resilient than expected, improving the prospects for consumer spending in the months ahead. 

Turning to the laggards, the financial sector was the worst performer in the first quarter as the regional banking crisis weighed on bank stocks and financials more broadly. Energy also logged solid declines through the first quarter as growing concerns about global economic growth and subsequent weakness in consumer demand weighed on energy stocks. More broadly, the remaining S&P 500 sectors saw small quarterly gains or losses, as there remains a lot of uncertainty about future economic growth and earnings and the banking stresses that emerged in March will only add an additional headwind on economic growth.  

US Equity IndexesQ1 ReturnYTD
S&P 5007.50%7.50%
DJ Industrial Average0.93%0.93%
NASDAQ 100 20.77%20.77%
S&P MidCap 4003.81%3.81%
Russell 20002.74%2.74%

Source: YCharts

Internationally, foreign markets largely traded in line with the S&P 500 in the first quarter and realized positive returns. Foreign developed markets outperformed the S&P 500 through the first three months of the year as economic data in Europe was better than expected and European banks were viewed as mostly insulated from the U.S. regional bank crisis. Emerging markets logged slightly positive returns through March but underperformed the S&P 500 thanks to still-elevated geopolitical stress, as U.S.-China tensions rose following the Chinese spy balloon affair.  

International Equity IndexesQ1 ReturnYTD
MSCI EAFE TR USD (Foreign Developed)8.62%8.62%
MSCI EM TR USD (Emerging Markets)4.02%4.02%
MSCI ACWI Ex USA TR USD (Foreign Dev & EM)7.00%7.00%
Source: YCharts

Commodities saw sharp declines in the first quarter thanks mostly to the notable weakness in oil prices, which hit fresh 52-week lows. Oil fell during the first quarter on rising global recession worries and subsequent reductions in demand expectations, while geopolitical risks didn’t rise enough to offset those demand concerns. Gold, however, posted a solidly positive return as investors moved to the yellow metal as a store of value amidst the regional banking stress.  

Commodity IndexesQ1 ReturnYTD
S&P GSCI (Broad-Based Commodities)-4.94%-4.94%
S&P GSCI Crude Oil-6.15%-6.15%
GLD Gold Price8.00%8.00%
Source: YCharts/koyfin.com

Switching to fixed income markets, the leading benchmark for bonds (Bloomberg Barclays US Aggregate Bond Index) realized a positive return for the first quarter of 2023, although bonds were volatile to start the year. The Fed signaling an imminent end to rate hikes combined with concerns that the regional banking crisis would raise the odds of a recession, fueled a broad bond market rally in the first quarter.

Looking deeper into the fixed income markets, longer-duration bonds outperformed those with shorter durations in the first quarter, as bond investors welcomed further declines in inflation and reached for long-term yield amidst an uncertain outlook for future economic growth.

Turning to the corporate bond market, higher-quality investment grade bonds and higher-yielding, “junk” rated corporate debt registered similarly positive returns in the first quarter. Investors moved to both types of corporate debt following declines in inflation and as corporate earnings results were largely better than feared.  

US Bond IndexesQ1 ReturnYTD
BBgBarc US Agg Bond2.96%2.96%
BBgBarc US T-Bill 1-3 Mon1.09%1.09%
ICE US T-Bond 7-10 Year3.55%3.55%
BBgBarc US MBS (Mortgage-backed)2.53%2.53%
BBgBarc Municipal2.78%2.78%
BBgBarc US Corporate Invest Grade3.50%3.50%
BBgBarc US Corporate High Yield3.57%3.57%
Source: YCharts

Second Quarter Market Outlook

Markets begin the new quarter facing multiple sources of uncertainty including the path of inflation, future economic growth, the number of remaining Fed rate hikes, and whether the regional banking crisis is truly contained. Yet despite all this uncertainty, markets have proven resilient over the past six months since hitting their lows in October of 2022. So, while headwinds remain in place and markets will likely stay volatile, there remains a path for future positive returns.  

Starting with the regional banking crisis, despite consistent comparisons in the financial media between what happened in March and the 2007-2008 financial crisis, there are important differences between the two periods and regulators have already demonstrated their commitment to ensuring we do not experience a repeat of those difficult days. As we begin the new quarter, there is reason for hope this crisis has been contained. But regardless of whether that’s true, regulators and government officials have proven they are ready to use current tools (or create new ones) to prevent a broader spread of the regional banking crisis, and that’s an important, and positive, difference from 2008.

Looking past the regional bank crisis, inflation remains a major longer-term influence on the markets and the economy, and whether inflation resumes its decline this quarter will be very important for investors and the markets. More specifically, the decline in inflation somewhat stalled in February and March but if the decline in inflation resumes in the second quarter that will provide a powerful tailwind for both stocks and bonds.

Regarding economic growth, markets rallied on the hope of an economic soft landing earlier in the first quarter, and while the regional banking crisis complicates that optimistic outlook, it is still possible. To that point, employment, consumer spending and economic growth more broadly have remained impressively resilient, so while we should all expect some slowing in the economy this quarter, a recession is by no means guaranteed. If the economy achieves a soft landing that will be a material positive for risk assets.

Finally, after one of the most intense interest rate hike campaigns in history, the Fed has signaled that it is close to being done with rate increases, and that will remove a material headwind on the economy. As long as that expectation for a looming end to rate hikes does not change, it’ll increase the chances that the economy can achieve the desired soft landing. 

To be sure, this remains a tumultuous time in the markets. Investors are facing the highest interest rates in decades, the worst geopolitical tensions in years, and a very uncertain economic outlook that deteriorated in the wake of recent bank failures. But while concerning, it’s important to realize that underlying U.S. economic fundamentals and U.S. corporate earnings proved incredibly resilient through the first quarter. And those two factors, steady economic growth and strong earnings, are the real long-term drivers of market performance, not the latest disconcerting geopolitical or financial headlines.  

As such, we are prepared for continued volatility and are focused on managing both risks and return potential. We understand that a well-planned, long-term-focused, and diversified financial plan can withstand virtually any market surprise and related bout of volatility, including bank failures, multi-decade highs in inflation, high interest rates, geopolitical tensions, and rising recession risks.

Successful investing is a marathon, not a sprint, and even intense volatility is unlikely to alter a diversified approach set up to meet your long-term investment goals.

Therefore, it’s critical for you to stay invested, remain patient, and stick to your plan, as we’ve worked with you to establish a unique, personal allocation target based on your financial position, risk tolerance, and investment timeline.

Filed Under: Focused Finances Blog, Investments, Market Commentary

Personal Financial Planning for your Biggest Investments

January 16, 2023 by Patricia Jennerjohn CFP®, MBA

If you are like most folks, in your mind the word “investment” usually refers to your mutual fund holdings, or your 401k or IRA account. However, “investment” is a broad term that refers to a number of aspects of your life. Here are some of the biggest investments you have, that you might not be aware of, in your personal financial planning.

Your Career

Take a step back and look at your career. Do you enjoy what you do? Are you fairly compensated for the work you provide? Have you looked at your benefits recently? If you do not have a good benefit package, you can end up having problems while you are working, and when you stop working.

There are several ways to save for financial independence, but working with an employer’s retirement package is one of the best options. Not only should you look at the level at which you are investing, but the amount your employer matches. The other thing to consider with your job is the health insurance and life insurance programs you are being offered. Are you given a low rate for insurance? Can you buy an adequate and appropriate amount of coverage? 

Talk to your employer about your current benefit package to make sure you are not paying more than you should. Talk about other benefits like tuition reimbursement, credit unions, and corporate travel discounts to capitalize on these savings and enhance your personal financial planning.

This is an important aspect of personal financial management, as you need to know where your money is going, and what your employer is doing to help you.

Your Health

Do you take the time to work out each day? If you have a list of excuses as to why you cannot exercise, or you cannot give up the junk food for healthy options, you can easily hurt yourself financially. Healthier eating and living a healthier lifestyle is a smart part of personal financial planning as can help to shield you from excessive medical expenses.

Your Relationships

How do you fare with your personal relationships? Are you happy with your marriage? Are you happy with the relationships you have with your loved ones and friends? You need to improve your relationships to boost your health and overall well-being. If you must go through a divorce, you can face significant costs, which can take years to recover.

Money Behavior

Another investment you might not be aware of is the way you spend money. If you are an impulse buyer, you can end up spending more for a product than it is truly worth. If you can cut $5 from daily expenses and invest it at 6%, you can end up with $300,000 after 40 years! This shows the importance of a single dollar and why you need to have smart investment management to save money for your future.  Being wise with your money is a critical practice when it comes to achieving financial confidence. Learn how to manage all these different areas of your life to have a happier life, free of debt and stress.

Filed Under: Financial Behavior, Focused Finances Blog, General Interest, Investments Tagged With: benefit package, financial independence, health insurance, investment, personal financial management, personal financial planning

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Patricia Jennerjohn, CFP®, MBA

Patricia Jennerjohn

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All written content on this site is for information purposes only. Opinions expressed therein are solely those of Patricia Jennerjohn, Managing Partner, Focused Finances LLC. Material presented is believed to be from reliable resources and no representations are made as to its accuracy or completeness. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security. Fee only financial planning and investment advisory services are offered through Focused Finances LLC, a registered investment advisory firm in the state of California.

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