ECONOMIC IMPACT. After a brief period of optimism for rate cuts in 2023 which resulted in a better environment for growth, the Fed reiterated its path on rate increases on Friday. By years end its likely we see another 1% increase in shorter term rates with 0.5% in September. Expectations of better economic growth were dashed for 2023 as this may will result in no rate cuts in 2023. Time will tell, but the bigger picture is that by years end the rate hiking cycle will conclude if not sooner post September as its becoming clear that little or not growth is on slate for next 12 months. The additional fiscal spending and debt relief from student loans will likely cause the Fed to raise rates further than if they weren't initiated while providing little sustainable growth if at all as interest rates rise further. What's clear is we have White house policy that is counter to the efforts of the Fed to slow growth and combat inflation, only delaying any sort for rate cuts and pressuring the Fed to raise rates more in 2023 not less.
INVESTMENT IMPACT. In the end one way or another we are expecting another leg down in economic growth going into year end. Whatever, positive effects of more fiscal spending occurs the offset will be higher rates thru 2022. However, the big picture is rate hikes may conclude by year end and slow or no growth to continue into 2023 causing the Fed to eventually consider rate cuts not hikes. Right now markets are not considering that focusing on slowing growth and short term rate hikes and risks they pose. We are uncertain if any rate cuts will occur in 2023 thus why we shifted our model exposure away from technology to heath care once again. The effect of all this, pushed out any cyclical recovery probably into 2024 and thus pressing stocks in near term. Health care may continue to benefit relative performance in the models since its shielded from slowing growth.
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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