BCA Weekly Commentary 5/5/23: Cyclicals to Lead Heading Into 2024?
ECONOMIC IMPACT. We continue to expect the Fed to pause then lower rates in 2024 inline with what market expected although we differ on timing and magnitude. Nonetheless, markets will begin to discount this via Fed jaw boning later in year once economic stats begin to cool. Speaking of stats, we continue to observe that the employment data being manipulated to given appearance of higher employment and lower unemployment. Its become so obvious that even the dense can see it now. However, the FED continued to raise rates not only questioning (despite the glaring issues with employment) their credibility but now the their political independence. Yet are still in denial that their rapid rate hikes are causing severe strains on credit. All in all having said all this the picture of very slow growth ahead still remains intact albeit with lower rates and inflation likely ahead.
INVESTMENT IMPACT. Since our last newsletter we added significantly to our medical device holdings in our growth models to balance the cyclical side of the portfolio. Why? Well to recognize that rates will likely head lower in 2024 not 2023 as markets expect thus fueling concerns over growth. Medical devices are somewhat better shielded by these concerns. However, as mentioned above as we head into 2H23 we think rate cuts will become increasingly likely as economy slows setting up the cyclical side (and REITS) of portfolios to outperform. That includes our bank exposure in not only common stock but preferred stock as well. We long believe the concerns over regional banks was way overblown as selling has occurred in poorly run banks and even the ones run conservatively...resulting in extreme panic. Further, we believe prices are reflective of fundamentals and banks are being used as a proxy war by Wall Street to force fed to lower rates. Lower rates or even the expectation of (which exists currently begging the question why is this being ignored by investors and its positive impact on banks) may alleviate much risk of deposit flow out of banks.
Lastly, I want thank our loyal clients to sticking with us. Those who have reap rewards of the significant outperformance thus far this year.
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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