The Highlights:
- Growth stocks (especially tech stocks) have been the leaders so far in 2023.
- We think the stock market is not discounting the many possible negative surprises.
- We prefer steady, consistent dividend growers.
Are Rate Hikes Done?
It is very possible that the Federal Reserve is now done with their rate hikes. At over 5%, higher short-term rates are having the desired effect of slowing down inflation (albeit not fast enough for the Fed’s liking). But systemic stress due to the rapid rise in rates is apparent in the multiple bank failures we have seen this year. We fortunately preferred to get most of our financial services sector exposure via financial data and technology companies (Visa, FactSet), asset managers (BlackRock) and insurance companies. We do still favor our JPMorgan position, as we feel JPMorgan is poised to take advantage of the turmoil and increase market share (as already evidenced by its purchase of First Republic).
Caution Is in Order
The stock market seems too optimistic that inflation is no longer the grave problem it was last year and that the Federal Reserve will achieve the mythical economic soft landing this year. The bond market historically is better at sniffing out future problems, and the inverted yield curve is telling us that there will be economic pain in the near future. Despite growth stocks in general and large technology stocks in particular having a great start to the year, we think caution is in order and that more defensive stocks will be a better bet for the second half of 2023. This is mainly because we see a higher possibility of negative surprises versus positive ones.
One example is the political wrangling over this country’s debt ceiling. It will eventually get sorted out, but when? The longer the drama drags out, the more volatile (and unhappy) the market will be. And what happens if bank failures increase and can no longer be called “isolated incidents?” What if inflation stops declining? The market is not assigning much of a probability to any of these “negatives.” We are.
With that in mind, portfolio highlights include:
- Continuing to favor companies that have a track record of consistent dividend payouts and a history of increasing those payouts
- Favoring non-bank financial sector exposure
Now that tax season is behind us, we look forward to having more detailed discussions about financial planning and portfolio strategy with our clients.