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Volume 12, Edition 4 | February 13 – February 17, 2023

Loving Your Portfolio in 2023

Doug Walters, CFA
Valentine’s Day has passed, but it’s not too late to rekindle a long-term relationship with your investment portfolio.

Contributed by Doug Walters, Max Berkovich, David Lemire, Eh Ka Paw

Stocks ended the week down, but only slightly, as investors pondered whether interest rates may need to stay higher longer. With inflation still elevated and debt ceiling discussions ongoing, investors appear to have a lot on their minds. At times like this, it is good to have a faithful partner by your side… your portfolio.

We often get asked about what the future holds and how we are positioning to take advantage. I’m flattered that people believe investment professionals can predict the future, but also sad because I know where these questions come from. So many investment advisors and CNBC talking heads speak as if they have seen the future in their crystal ball. But the future is unknowable, and your portfolio needs to reflect that reality.

That is why long-term relationships are encouraged when it comes to portfolios. Anything can happen tomorrow; the worst-case scenario and the best-case are in the realm of possibility. A well-constructed, well-diversified portfolio – at the right risk level – is the best preparation for the unknown.

So, is your portfolio always the same? Absolutely not. But instead of shaping your portfolio based on guesses of the future, you should base it on what you know today. Is one segment of the market historically cheap, while another is expensive? Then perhaps it is a good time to tilt your allocation. We call this evidence-based investing. Follow the science, not speculation.

5.5%

Top end of forecast Fed Funds rate

Recent economic data, along with commentary from the Fed has pushed the high end of the expected terminal Fed Funds rate up to 5.5%.

Headline of the Week

At the risk of repeating, the headlines continue to point to the economy and, by extension, Fed policy. The adage “don’t fight the Fed” seems to be winning out, as does a more recent adage “higher for longer.” This week markets wavered and started to position themselves for the Fed to continue raising rates and to hold them there longer or at least not cut them this year.

The economic straw that broke the market’s back appears to be the strong consumer spending report. Additional straws include signs of inflation from producers as well as steady jobless claims. Consumer spending was bolstered by raising wages and cost-of-living adjustments to social security. Inflation pressures are still lurking in the nation’s supply chains which can leak into consumer prices. Despite layoff headlines, jobless claims continue to point to employment strength. Topping it off, a couple of non-voting Fed members mentioned their preference for 0.50% rate hikes.

The strong start to the year in stock and bond markets largely reflected this fight with the Fed and disbelief that the Fed would follow through. This Fed’s message seems to be getting through, and markets thus far seem to be adjusting appropriately.

The Week Ahead

Thanks to Presidents’ Day, a four-day work week will bring plenty of noise, with the biggest coming from the minutes of the last Federal Reserve meeting and yet another inflation report. However, the one-year anniversary of the War in Ukraine will add an extra layer of commotion.

Public Enemy #1

Inflation is the main driver of markets, so Personal Consumption Expenditures Index (PCE) on Friday is the hands down most important data release.

  • PCE has been the Federal Reserve’s preferred inflation gauge.
  • The core PCE (excluding energy and food) rose 0.3% in December and is expected to do the same in January, which would put us at a 4.4% annual inflation rate.
  • Progress on inflation is necessary as markets now moved the needle on the terminal rate of the Federal Reserve rate range (the level where they would stop hiking rates) to 5.25%-5.5%, ¼ of a percent higher than a week ago.

Minute After Minute…

The Federal Reserve’s meeting minutes are released mid-week.

  • Most Fed watchers will be looking for hints as to what the central bank was hoping to see from data that was out later in February and trying to reconcile versus what we know now.
  • The language surrounding the number of hikes, as opposed to the size, will now be the key signal for traders.

Second Glimpse

U.S. 4th quarter GDP is out, though this is not the first attempt. This is a revised number.

  • The first announced rate was an expansion of 2.9% of the U.S. economy in the last quarter of 2022, and experts don’t predict any revision to that rate.
  • That was notably higher than the 2.5% initially expected and followed a 3.2% expansion in the 3rd quarter.

Anniversary

Friday will mark the one-year anniversary since Russia invaded Ukraine.

  • Look for the markets to take inventory of what damage has been done.
  • Monetarily the developed nations have provided Ukraine with $36.4 Billion, 58% of which is loans.
  • The U.S. has contributed $13 billion already.

Shop Till You Drop

Earnings season takes a very consumer-oriented turn next week with Walmart (WMT), Home Depot (HD), TJX Companies (TJX), and Booking Holdings (BKNG) as the most prominent on the calendar.

  • A report this past week from the Federal Reserve Bank of New York indicated credit card balances increased by 6.6% in the 4th Quarter of 2022 to nearly $1 Billion.
  • These reports should help identify where that $61 Billion of consumer borrowing was spent.

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