The Cornerstone Investment Commentary: 2nd Quarter 2023
Once again, patience is a virtue when it comes to investment results. With their second quarter increases, your portfolio’s equity holdings are within 8% of their all-time high at the very end of 2021.
This is no small matter. After such strong gains from 2019-21, equities were quite susceptible to any changes to their ‘ideal environment’ (low interest rates and low unemployment). Then came the big declines of 2022. Given 2023’s strong results thus far, if this ended at June 30th levels, annualized equity returns since 2018 would exceed 10% per year. Without this year’s gains, that figure would be less than 7.5% annually.
Your portfolio’s results have been even better, due mostly to the rebalancing we implemented last year. As a reminder, rebalancing is beneficial when equities are added after downturns (to ‘buy low’) or pared back after upswings (to ‘sell high’). Now one year on from our June 2022 rebalancing, the equities added at that point – not far from the market low – have risen over 18% through this June 30th as they were ‘topped up’ to be more opportunistic when inflation rates ebbed.
This past quarter, as we would expect with falling inflation and a lower likelihood of so many interest rate increases, U.S. growth stocks led the way by a wide margin. In a first since last summer, foreign stocks lagged those in the U.S. due to the dollar’s recent rise. Commercial real estate (REITs) managed a small gain, and commodities continued their decline which began over a year ago.
Bond markets had a difficult quarter due to both the uncertainties generated by the Debt Ceiling ‘drama’ and the disappointment at the Fed’s messaging that a few more interest rate increases were in the offing. That said, the window for such increases is much narrower than six months ago, and the intermediate-term U.S. Government bonds you own should benefit from this when they end, especially as inflationary pressures continue to ease and if the economy experiences a mild recession.
Going forward, it seems prudent to be a bit more cautious for two reasons. First, further recovery often occurs more slowly once so much of it has already happened. And second, it won’t be surprising if economic and employment growth slow in future months as the effects of the Federal Reserve’s many rate hikes are more fully felt. This means you will see us rebalancing in the opposite direction to slightly decrease your equity holdings from their current opportunistic allocation level and adding to your existing fixed income (bond) allocation.
As we wrote last quarter, we may of course see negative surprises. (Fortunately, these will not be related to the Debt Ceiling and now seem less likely to involve bank failures!) As always, we will meet these with the thoughtful and prudent approach that you have come to expect from us. With our thanks for the continuing opportunity to work with you, we send our best wishes for many healthy and enjoyable summer days in the months ahead.