While a diversified portfolio posted solid gains in the first half of 2023, investment returns varied widely by security type and industry. After the bear market in the first nine months of 2022, stock values have rallied more than 20% as measured by the S&P 500 Index. It may not feel like it, but that means a new bull market for stocks began in October 2022. Values for bonds moved sideways in the first half of the year, as the US Federal Reserve Bank pushed interest rates higher. Higher rates have been beneficial for risk-averse investors with yields for money markets and certificates of deposit (CDs) higher than they’ve been since before the financial crisis in 2008.
Investors remain cautious as risks to economic growth weigh on future expectations. After more than a decade of historically low interest rates, consumers are now forced to pay more in interest on their big-ticket purchases. In addition to higher borrowing costs, prices for houses and cars have increased significantly since the pandemic. The Millennial generation, which is now larger than the Baby Boomers, are starting to settle down and these additional consumers are competing for a limited inventory of houses, cars and other household goods. Unless supply and demand approach a state of equilibrium, inflation will continue to be a headwind for economic growth.
US and world political risks also clutter the views of many investors. Social issues tend to dominate American minds as the divide between traditional and progressive ideals widens. The war between Russia and Ukraine has been raging for more than a year and it feels like we are one misstep away from igniting World War III. China continues to flex its economic muscles, dominating global production of solar panels and electric vehicle batteries. As the US pivots away from fossil fuels, we are heavily reliant on China’s green energy capabilities.
Given these economic and global concerns, many investors have flocked to the safety and attractive yields of money market mutual funds and CDs. While a 5% return sounds great, there are two main risks for long-term investors. While inflation has moderated to around 4% in recent months, the net real return for secure investments is close to 0% and could turn negative. And, as often happens, returns for risk-based securities like stocks have rebounded from 2022’s bear market and posted solid double-digit returns so far this year. If interest rates stabilize and start to decline, bond values should appreciate, providing a higher return than risk-free assets.
If inflation and geopolitical issues aren’t enough to worry about, economists have been predicting an imminent recession since the US Gross Domestic Product shrank in the first two quarters of 2022. While a strong labor market and resilient consumer have helped maintain slow economic growth, the threat of recession still looms over investment markets. Despite these risks, we believe maintaining a diversified portfolio and not trying to time the market by altering your investment allocation is the best strategy for growing your investment portfolio’s value.
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This article was authored by Christopher Borden, a financial advisor and Managing Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or cborden@canbyfinancial.com.
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. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product.
The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks.
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