ECONOMIC IMPACT. Signs continue to mount that the rise in interest rates will not only slow the economy even further but throw it back into recession a second time. Corporate America is confirming this as cos like Fedex, Nike, Micron, Carmax, Ford have confirmed a dramatic shift in consumer spending occurring late in their respective quarters. This has yet to show up in govt economic data, but has in some of the regional Fed surveys. The blind Fed may finally see this (as clearly market does) in data in the coming months and signal a tempering of rate hikes or even a pause. This latter point HAS NOT YET OCCURED as the Fed continues to signal that they will stay its course of aggressive rate hikes. In the UK and in China central banks have changed their stance realizing the inflation that exists is not under their control but tied to war not demand which is now falling. Why our FED does not see this is a wonder, but when it does we may enter a falling rate environment not a rising one.
INVESTMENT IMPACT. Since the Fed has yet to capitulate on realization of recession and the narrative probably for political reasons continues to be that the economy is fine long term rates continue to rise as are stocks sensitive to them. However, we believe that may change in the coming months and in 2023. To be clear that does not mean we think the Fed will change course and cut rates anytime soon, but only potentially pause. That may allow long-term rates to stabilize or fall quelling fears of a depression or something breaking causing another financial crisis. Rate sensitive cos whose valuations have fallen with rising rates may in fact be the ones that rise in the coming year tied to lower or stable long-term rates. Thus why we have shifted 60% of the models to dividend paying stocks more tied to the economy & interest rates vs health care where valuations are higher. Although shielded by the slower economic growth, these highly valuated health care stocks maybe handicapped by the higher rate environment in their valuations seeing them compress. To, reiterate we are likely entering a sustained period of no growth where rates remain elevated, but begin to fall. We choose larger dividend paying stocks trading at multi-year lows (where fear is greatest on higher rates) so clients can get paid while awaiting better times or at least when interest rate fears subside. Our most Aggressive Growth model now has a yield approaching 3% currently. We believe this opportunity to capture yield and growth occurs maybe once a decade or two whereby clients can be setup for long-term returns in both capital appreciation and dividends in large more stable companies. In the end we do not think rate hikes or the current level of rates is sustainable thus why we are seeking yield now when we can and stocks that provide it are being sold not bought. WE REMIND INVESTORS LAST YEAR WHEN NO ONE SAW THE RECESSION TO COME AND WE DID AND IT TOOK TIME FOR MOST TO SEE IT. NOW THEY NOT ONLY SEE IT BUT FEAR IT, BUT STILL FEAR HIGHER RATES UNTIL FED SIGNALS OTHERWISE.
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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