ECONOMIC IMPACT. Much has changed since our last newsletter as markets went from recession to no recession to even higher rates then to credit crisis thereby increasing recession fears and dramatically lowering long-term rates. Further FEAR is running rampant tied to SVB failure that the credit crisis will spread to other banks. Much of bank fears was derived from years of zero rates and money printing ultimately leading to inflation (trigged by $Trillion printed & govt lending pre covid-19). With inflation waning and credit crisis uncertainty (thanks to Fed raising rates devaluing govt bonds which bank use) its likely the Fed will signal a pause in rate hiking next week and ultimately lower rates in 2024. How much so will be up for debate, but it is now a necessity if anything to stabilize bank balance sheets, never mind prop an economy that is about to see significantly tighter credit conditions as banks stop lending. To be clear we had always maintained the economy was much weaker than perceived despite the run up of higher rates weeks ago.
INVESTMENT IMPACT. The back drop of our core medical REIT holdings via much lower rates has only served to build the case for appreciation as rates fall into 2024. We have shifted assets to a few medical device growth names as well as adding to our bank holdings. Since rates are likely to get lowered this will signal a better environment for select growth, cyclicals and REITs all of which are part of model portfolios. The bank crisis will need to lift first for that to happen, but we expect in 2H23 markets will start discounting a better lower rate economic environment if not sooner. Given the panic ongoing we maintain preferred stock positions in select regional banks as well as 2 regional banks dominating in the South East where demographics favor growth and we deem conservatively run. We still expect rate cuts to be come, but caution growth may not be robust. Nonetheless our models are balanced between cyclicals & REITS that have yields and valuations tied to lower interest rates as well as medical tech growth whose valuations may expand with lower lower rates.
We remind investors that going forward expectations for returns for the overall market over the next decade remain low as we expect well below returns vs history. Be that it may we are hopeful our models can improve on that going forward.
Our model portfolio performance has been updated as of the date of this newsletter.
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