Ladies and gentlemen, the weekend! In this space each week, Greg and I share some of our favorite articles, notes, and graphics from the past week along with our commentary. Please feel free to provide feedback and forward along to others if you enjoy. We appreciate you taking the time to read. 

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Polar Opposites

“Investors tend to over-extrapolate. I’ll use myself as an example.

One of my ten predictions for 2023 was that energy would be the first sector to lead the pack for three consecutive years since utilities did in the late 80s.

¯\_(ツ)_/¯

Not only did this not come true, but the opposite is happening. Energy is the second-worst performing sector YTD. Energy isn’t the only thing that bears no resemblance to the prior year. 2023 is laden with extreme turnarounds.

The U.S. dollar was a wrecking ball in 2022 as money flowed into the safest of safe havens. This is more of a risk-on year, and the dollar is going the other way. It’s currently down 4% on the year…

Interest rates and inflation killed growth stocks last year. Interest rates haven’t reversed, but the performance of growth stocks has. There is plenty of room for debate as to why this is happening, but the numbers are what they are. The mega-cap tech stocks are undoing much of the damage done in 2022…

It’s normal to think that what’s happening today will happen tomorrow and the day after. Trends can and do last longer than you might think, but once they turn, it’s easy to be caught off guard. If you’re buying and selling individual names and sectors, remember that past performance is no guarantee of future results.”

Mean reversion is a powerful force in investing. You have probably noticed the disclosure phrase at the bottom of nearly every investment presentation – “Past performance is no guarantee of future results.” We are living it out in 2023. The dogs of last year are gaining back some ground, even though conditions are not all that different. Interest rates are high, but inflation is falling. The Fed is still tight, but we are much closer to the end of federal funds rate hikes than the start on March 16, 2022.

The only constant in life is change. Markets are similar. We would look for more of the same (change) in the second half of the year.

Bonds: A H1 2023 Report Card

“After arguably the worst year on modern record in 2022, it was our belief that this year was set up to be a potential positive experience for the bond investor. And, despite continued rate hikes from the Federal Reserve and other global central banks, fixed income total returns have indeed moved back into the plus column thus far in 2023.

Let’s take a look at the first-half report card.

Unfortunately, in order to gain some perspective on this year’s developments so far in the bond market, we do need to take a look back at the ‘year that should not be named’…2022. In other words, any positive performances here in 2023 must be looked at in the context of just how ‘bad’ 2022 actually was…

The best place to start would be the U.S. Bloomberg Aggregate Index (Agg), otherwise known as the benchmark for fixed income markets. In 2022, the Agg plummeted by 13%, as the four major areas that make up this index all struggled mightily. Through the first two weeks of July this year, the Agg has managed to rebound by almost 2.3%. While this performance does not come close to making up for last year’s loss, it’s still nice to be back in the plus column…

Conclusion

Obviously, the results outlined in this blog post are, to some extent, yesterday’s news. The natural question is where are we going from here? With the Fed, and perhaps other global central banks, nearing the end of their respective rate hike cycles, inflation continuing to cool and economic growth softening, it seems reasonable to expect fixed income returns will remain in positive territory through the second half of this year.”

I could have copied and pasted most of the same comments from stock markets’ polar opposite first half for fixed income markets.

After a rapid rise in rates during 2022, rates have stabilized across the yield curve allowing investors to pick much higher coupons. That stability led to a performance reversal on the U.S. Aggregate Bond Index from a 13% loss in 2022 to a 2%+ gain year-to-date in 2023.

Bond Market Outlook: Valuations Suggest Potential for Equity-Like Returns with Less Risk

“[PIMCO's Kimberly] Stafford: Volatility in the fixed income markets has been high, while the equity markets don’t appear to be pricing in an economic downturn. How do you look at the bond market versus the stock market, and how can investors build resilient portfolios?

[PIMCO Group CIO, Dan] Ivascyn: The bond market’s massive repricing may allow investors to earn the highest real yields in 12 years without taking uncomfortable risk. High quality bonds offer potential for equity-like returns with less volatility and less downside risk than equities – which is expected to be valuable as we confront the meaningful risks of persistent inflation or a hard landing. To that end, we’re focusing on high quality, less economically sensitive areas of the market, while preparing to pivot when pricing in other areas adjusts to reflect changes in fundamentals. Specifically, over the next few years, we expect to rotate into opportunities in the more economically sensitive or lower-rated areas of the public corporate credit markets, and then into the private markets as they finally begin to reflect true fundamentals...

Stafford: Any final thoughts?

Ivascyn: We expect this environment to provide the best opportunities in years for fixed income investing. We’re leveraging PIMCO’s broad and deep global platform across public and private markets to identify opportunities as the credit cycle advances and market excesses are wrung out. In the meantime, high quality bonds pay us to wait as downside risks build in the global economy.”

Please take market projections with a grain of salt, but the nature of fixed income returns makes their outlooks much more palatable.

PIMCO expects fixed income, especially high-quality credit, to produce the highest inflation-adjusted returns in more than a dozen years. That outlook tracks when you look at current nominal bond yields and inflation expectations. 

Wall Street strategists (except for Fundstrat) are being “short squeezed” as the stock market blows through year-end projections even though we’re barely past the midpoint. Upward adjustments appear to be reluctant as the average revised target is 6.5% below current levels.

Thanks for reading. Have a great weekend!

RBG Wealth Advisors LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.