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Dear Friends,
As we have reached the halfway point for the year, the investment management team at IEM continues to maintain its cautious-yet-optimistic approach to the economy, the markets, and our investment strategy as we look to the second half of 2023. In January, very few could have predicted that the markets would have one of their best starts to the year for the last two decades, but that is where we are today. Mathematically, we still have a lot of ground to make up to get back to where we were at the beginning of 2022, but – despite the negative headlines – economic data supports the fact that the economy is not in as dire of straits as many seem to think.
In our most recent investment committee meeting, we agreed that although the market has had a remarkably good start to the year, we don’t want to get “caught up in the giddiness” that has many people feeling like this is the next dot-com bubble. Artificial Intelligence and the prospects of what it could do for company productivity have been a tailwind for stocks this year, especially the technology-heavy NASDAQ index.
It could be argued that only a few of the big technology companies like Apple, Meta, and Microsoft are holding up the entire market. While we are cautious about this quick run-up in stocks, we also do not want to be left on the sidelines, so we have continued with the strategy we began earlier this year to move some exposure from international investments to more US domestic growth stocks.
We still believe that after the selloff last year, US growth stocks continue to present an attractive buying opportunity and are poised for more rebound as the economy navigates through what we believe will be a fairly shallow recession. We believe these smaller, strategic adjustments to our equity portfolio while maintaining a balanced long-term approach should boost returns while maintaining safety for our clients through diversification.
On the fixed income side of our investment strategy, we agreed to maintain our balanced approach and eliminate underperforming investments where it makes sense. Inflation expectations are now at their lowest in two years, so – in continuing with our strategy of reducing inflation-protected securities this year – we have decided to eliminate our dedicated inflation-protected bond position in all portfolios.
The rapid rise in interest rates has been very detrimental to bond portfolio values in the last year or so, but we believe it now presents a unique opportunity for clients to receive higher coupon payments (dividends) and rates of return on their bonds. To benefit from this new higher interest rate fixed-income landscape, we are increasing the average duration of our bond portfolios while also adding more high-yield money market funds, which are currently providing the highest interest rates for this asset class that we have seen in decades.
Within the taxable investment models, rebalancing is more nuanced due to the tax impact of selling positions with unrealized gains, for which the taxes owed can more than offset the benefits of shifting the portfolio. Instead, we’re paying fund distributions (dividends and capital gains) to cash, which will be used to rebalance accounts currently overweight to their target allocation without incurring additional short- or long-term gains. Additionally, some taxable accounts will see an increased allocation to US stocks as part of the overall rebalancing strategy, but within the context of maximizing after-tax returns while avoiding portfolio turnover.
At IEM, we stand by our philosophy of not trying to “Beat the Market” and seek to instead provide value to our clients through strategic investing and diversification that is thoughtful and forward-looking while avoiding the tendency to follow trends. This approach – in combination with comprehensive financial planning – is designed to provide the best possible investment outcomes for our clients.
In addition to this commentary, we also recommend reading Commonwealth Networks’ full 2023 Mid-Year Market Outlook for a more detailed look at the economic factors & research guiding our investment management decisions this year.
Sincerely,
Ted Smith, Founder & Chairman, RHU, CLU®, ChFC®
Danica Goshert, Senior Vice President, CFP®, CDFA®, AIF®, MBA
Dan LaNasa, Associate Vice President, CFP®
Charles Stewart, Associate Vice President, CFP®
Marcus Schaller, Manager of Financial Planning Services, CFP®, APMA™
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.
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