Portfolio Management Archives | Page 7 of 23

Will the Market Rally in the Second Half? Here’s What History Tells Us

During the first half of the year, the market was obsessed with a potential recession. When would it come? Would it be a hard or soft landing? As the summer moves on, this concern has given way to a quiet calm.

The banking crisis in March and the debt-ceiling debate in May seem like a year ago already, with little damage done to the economy. Market performance for the first half of the year was strong, which was surprising to many. After the rally for the first half of the year, the S&P 500 is less than 10% away from a new all-time high.

The historical precedent for a potential second-half rally is there: A strong first half of the year typically begets a strong second half, as shown in the chart below. Since 1950, when the S&P 500 has been up over 10% in the first half of the year, the median gain for the index in the second half has been another 10%. Second-half returns after a strong first half have been even better when the prior year was negative. Remember, though, that past performance is not indicative of future returns.

30 Years of S&P 500 Returns After the Benchmark Index Climbed 10% or More Through June

Chart showing S&P 500 returns in years when the index gained at least 10% in the first six months of the year. — *Source: Bloomberg Finance LP. Data as of July 5, 2023. Past performance is not indicative of future results. It is not possible to invest directly in an index.*

Hindsight makes investing decisions look easy: The average bear market return without a recession was -23%, and the bear market we just went through was down 25.4%. October has been the most common month when bear markets have ended (including seven of the last 18), and last October was no different.

Dating back to World War II, stocks have performed well the year after a midterm election. The chart below outlines year-by-year market performance during the presidential cycle for both re-elected presidents and new presidents. The second year has been the worst for new presidents, and last year was no different. However, the third year for a new president has been the strongest for market returns, and for the first half of the year, this has again held to form.

History shows that elections tend to have little lasting impact on the markets, even if certain sectors and industries are affected by actual policy changes. That does not mean that the volume of politics and commentary won’t rise as we get closer to the end of the year, as next year is an election year.

Under New Presidents, Stocks Underperformed Early and Improved Later

S&P 500 returns based on four-year presidential returns

Chart showing market returns in each year of a presidency. — *Source: Carson Investment Research, YCharts 12/30/2022. @ryandetrick*

The economy remains resilient as we begin the second half of the year. Going back to World War II, we have not seen the start of a recession in the year before an election year. There is still a chance for a soft-landing or mild recession, but the consumer remains strong. While credit card balances are higher than where they were in 2019, disposable income has grown at a great rate and the percentage of debt to income is lower than before the pandemic.

Unemployment levels remain near all-time lows. Employment growth has now beaten economists’ expectations for 14 straight months. During the first five months of 2023, the economy added 1.5 million jobs.

The housing market is showing signs of recovery as new home sales are up over 30% since November, energy prices have fallen and consumer confidence is improving. Earnings expectations are beginning to rise as margins are stabilizing with inflation coming down. All these factors reduce the risk of a near-term recession.

Recessions Since WWII

Chart showing start and end dates of the recessions since World War 2. — *Source: Carson Investment Research, NBER 11/21/2022. @ryandetrick*

The main risk of a recession last year was due to the Fed raising interest rates as quickly as it did. The Fed now is much closer to the end of the rate-hiking cycle. The path back to all-time highs is never easy, but the market has made big strides so far this year. The consumer has driven the recovery and carried the economy.

As a reminder, most Wall Street analysts predicted gloom and doom at the start of the year. On Tuesday, one of the last of the country’s major bear economists issued a mea culpa, admitting to clients that they were wrong and had missed out on the market run since October.

The key to staying on track is to avoid emotional reactions, no matter how stocks perform on a year-in-and-year-out basis.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market.

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Bloomberg, Carson, JP Morgan

Promo for an article titled Don’t Wait Until Retirement to Learn About Medicare — Here’s What You Should Know.

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS. Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

Don’t Wait Until Retirement to Learn About Medicare — Here’s What You Should Know

Inflation continues to come down after reaching a peak of 9.1% in June 2022 — a far cry from the high inflation days of the early 1980s, but levels we hadn’t seen in 40 years nonetheless. June’s Consumer Price Index (CPI) came in at an annualized rate of 3%, the lowest level since March 2021 and the 12th consecutive month of price decreases. The CPI remains above the Fed’s target rate of 2%, and while this report is good news for prices and pocketbooks, it is unlikely to stop the Fed from raising rates again later this month. Energy prices also are decreasing; gas was $5 a gallon at this time last year, and price increases were at their highest levels.

Inflation Pulls Back on Lower Energy, Food and Used Car Prices

Contributions to CPI Inflation (Year-Over-Year)

Chart showing category contributions to CPI, year over year, since September 2021. — Data source: Carson Investment Research, BLS 7/12/2023. Pandemic-impacted categories include car and truck rentals, furnishings and supplies, apparel, airline fares, lodging away from home including hotels and motels. Housing includes rent of primary residence and owners’ equivalent rent. Medical care includes medical care commodities and services. @sonusvarghese

The largest increase in inflation remains healthcare, which is up significantly since the start of the pandemic. For many people, the cost of healthcare is the biggest unknown for retirement planning. How long will I live? What medical needs will I have? Do I need long-term care coverage, and what will that pay for? Do I have enough money to pay for my healthcare needs as I get older, or will I have to depend on my kids or other family members?

Luckily for those who are about to turn 65 — or who are already older than 65 — there is Medicare, which includes several different forms of health care, some provided by the federal government and some by private insurers. Medicare can be complicated to understand, but it is important to know your options.

When do I sign up for Medicare?

The initial enrollment period is a seven-month period around the time you turn 65 and includes the three full months before the month you turn 65, the month you turn 65 and the three full months after the month you turn 65.

There are exceptions to the window for those who are still working and opportunities to enroll later in life. In some cases, though, you can end up paying higher rates by waiting.

What does Medicare entail?

Medicare consists of five major parts:

• Part A covers hospital and skilled nursing care, as well as some home and hospice care. As soon as you turn age 65, you are eligible for Part A, usually at no cost. At age 65, most individuals opt into Part A at a minimum. The main downside is that you are no longer eligible to contribute to a health savings plan if you chose Part A.

• Part B covers outpatient care, such as office visits, diagnostics and some preventative services. If you are on Social Security, you are automatically enrolled in Part B, which has a monthly premium that varies based on your income. If you are still working, you can decline Part B. Once you retire and lose your work insurance, you have an eight-month special enrollment period to sign up for part B.

• Part D is your drug plan that’s offered by private insurers. They require a separate premium that is regulated by the government. There are a wide variety of plans, so shopping to make sure you get the right one is important.

• Part C, also called Medicare Advantage, offers hospital and medical coverage along with benefits you do not get with basic Medicare, like vision, hearing and prescription drugs. Part C is offered through private insurers, and the out-of-pocket expense is capped by the government. If you chose Part C, you will probably not need Part D.

• Medigap Coverage is technically not part of Medicare, but it is commonly purchased as a supplement to Medicare. It is sold by private insurers to cover some costs that Medicare doesn’t, like copayments and deductibles.

What does Medicare not cover?

Medicare does not cover everything, and you will need to pay for or obtain other coverage as mentioned above for services that are not included. Some of the items and services Medicare does not cover are:

• Long-term care
• Most dental care
• Eye exams
• Dentures
• Cosmetic surgery
• Routine physical exams
• Hearing aids
• Concierge services

Medicare & You, the official U.S. government Medicare handbook, contains much more detailed information. (This is a good link to bookmark for future reference.)

If I am not eligible yet, what should I do?

As you approach age 65, mark your calendar for the specific date that you would like to enroll. If you are still working, it may make sense to enroll in Part A only and continue with your company insurance.

Take time to research Medicare plans to match your specific needs. At CD Wealth Management, we think this is an important part of your retirement and should be something you review each year.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Blackrock, Bloomberg, Carson, Schwab

Promo for an article titled Can the Market Repeat Its Performance from the First 6 Months?

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Can the Market Repeat Its Performance from the First 6 Months?

The first half of the year marked the second-best six month start for the S&P 500 this century, beaten only by 2019. The market is treading water so far in July, which seems appropriate considering the heat wave that has enveloped the country.

After cratering last year, technology shares carried the S&P 500 for the first half of 2023. Energy led the way for the S&P 500 last year, while technology brought up the rear, and the opposite has been true this year. The chart below shows a breakdown of the S&P 500 along with a comparison of market-weighted returns and equal-weighted returns.

The S&P 500 is a market-weighted index, with the largest stocks carrying the most weight. Apple, Microsoft and Amazon account for 17.62% of the S&P 500 Index. Due to the strength of returns for those three stocks in the first half, the return of the market-weighted S&P 500 index significantly outperformed an equal-weighted index.

In the equal-weighted index, each of the 500 holdings is roughly the same weight, with the largest holding being only .28% of the overall index. That’s a significant difference, compared to Apple being 7.66% of the overall market-weighted index. Since most of the return of the S&P during the first half of the year was from seven large-cap technology stocks, the equal-weighted index did not perform as well, with five sectors being negative.

A Tale of Two Markets

S&P 500 Performance by sector, year-to-date 2023

Chart showing S&P 500 market performance by sector from January 1 to date in 2023. — Source: Blackrock Investment Institute, with data from Refinitiv, June 14, 2023. Chart shows the year-to-date return of the S&P 500 index both market-weighted and equal weighted. Past performance is not indicative of current or future results.

We often talk about average return, or what the market has averaged over a long period of time. As a reminder, the market is rarely average. Just look at the last three years, starting with 2020: a drastic drawdown to start the year with the global pandemic, followed by a steep recovery in the same year. Then 2021 was another strong year, only to see the bottom fall out in 2022 for both stocks and bonds. Over the last 72 years, the market has fallen in the “average range” only four times — a good reminder that the market seldom gains the average of 8-10% in a calendar year.

An Average Year Isn’t So Average

S&P 500 gains between 8-10% are quite rare (1950-current)

Chart showing market average returns from 1950 to 2022. — *Source: Carson Investment Research, YCharts 1/2/23 (1950-current)*

Wall Street strategists remain bearish on the market for a variety of reasons: stretched technology valuations, stubborn inflation, current money market and short-term bond yields, the commercial real estate recession and ongoing concern about regional and smaller banks. They are more bearish now than they have been anytime over the last 24 years for the final six months of the year.

In other years when they expected a negative return over the final six months, we have seen the following returns, with the average return for those four years being 12.2% over the final six months:
• 1999: +7%
• 2019: +9.8%
• 2020: +21.2%
• 2021: +10.9%

Wall Street Strategists Stick to Cautious Equity View

Their S&P 500 target points to the most bearish second-half outlook on record

• S&P 500’s second-half outlook implied by strategists’ average year-end target

Chart showing the second-half outlook for the S&P 500 implied by strategists' average year-end target. — *Source: Bloomberg*

Still, there is no guarantee of positive or negative returns for the rest of the year. Ample cash remains on the sidelines, waiting to be deployed. While investors have hunkered down in cash, this also suggests that this money could make its way into the economy and the markets. This can lead to paralysis and contentment with short-term cash returns, but it also can be detrimental to long-term financial goals.

Every cycle is different, which makes investing amid uncertainty a challenge but also highlights the importance of being invested in a diversified portfolio. Equities historically have been the highest-returning asset class over the long run, and we do not see anything to alter that precedent going forward. We will continue to monitor the markets closely and make changes as necessary.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Blackrock, Bloomberg, Carson, Schwab

Promo for article on the formula for wealth.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Our 5 Most Popular Articles So Far in 2023, in Case You Missed Them

We wanted to take this occasion to look back at the content we’ve produced so far this year and share the five most widely read pieces of 2023 in case you missed any of them — or if you want to revisit and share them with friends and family.

Every week, we thoughtfully craft these pieces with our clients in mind, broaching subjects we think are relevant and interesting. This is not syndicated content. We want you to find value in these letters — especially in times like these.

1. A New Bull Market Has Begun — Here’s What Investors Should Know

June 15, 2023 | The S&P 500 closed more than 20% higher than its October low. For now, the 2022 bear market is over.

The duration of a bull market has varied significantly. Historically, bull markets have averaged 39.4 months and have produced an average gain of 130.1%. If you exclude the Great Depression, the average bull market has lasted 51 months and produced an average gain of 147%. We are now eight months into the current bull market, starting at the October low. Read more >

2. The Fed Raised Rates Again — Here’s What That Means for Investors

Feb. 9, 2023 | Though it appears that the Fed may be close to ending its rate-hiking cycle, additional increases still are likely.

As long as demand (GDP) and employment remain as strong as they are, the Fed will remain hesitant to cut rates and may even continue to raise them past the 5% federal fund target level. Remember, the stock market is a leading indicator, and it should lead the economy as it eventually stabilizes. Read more >

3. What Will It Take for Bonds to Bounce Back from a Historic Meltdown?

Feb. 2, 2023 | Strong yields and the prospect of a less hawkish Federal Reserve are breathing new life into bonds in 2023.

Loupe focusing on text on financial newspaper

The Fed is poised to continue raising rates. However, the increase is unlikely to be as dramatic as 2022. Strong yields and the prospect of a less hawkish Federal Reserve are breathing new life into bonds. Read more >

4. An Introduction to ChatGPT, With Some Assistance From ChatGPT

April 20, 2023 | The AI tool has the potential to be transformative, with capabilities that could change how businesses allocate resources.

Version of Michelangelo's painting "The Creation of Adam" depicting the development of artificial intelligence and machine learning. AI chat concept.

ChatGPT is a powerful artificial-intelligence chatbot that allows you to ask it questions using everyday language, rather than using search terms. ChatGPT responds in a conversational manner. As opposed to Siri or Alexa, these neural networks are trained on huge quantities of information from the internet of deep learning. Read more >

5. Here’s What Investors Need to Know About Banking Turmoil in the U.S.

March 13, 2023 | With the failure of Silicon Valley Bank and Signature Bank, the financial markets experienced a shock not seen since the Great Financial Crisis in 2008.

Silicon Valley Bank headquarters and branch

Could other banks have a similar fate to SVB? The short answer is yes. But remember: After both the Great Depression and the Great Financial Crisis, processes and procedures were put in place for this very reason. Read more >

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Promo for an article titled The Portfolio Changes We’re Making as We Enter the Third Quarter of 2023

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

The Portfolio Changes We’re Making as We Enter the Third Quarter of 2023

The dog days of the summer are upon us. As the weather heats up across the U.S., market volatility is cooler than it was before COVID. Last year’s market volatility hastened a flight to cash for many, with record inflows for money market and short-term Treasury notes.

You have heard this from us many times, and we will continue the same mantra: Overweight cash allocations may come with high opportunity costs, i.e., missing out on the market. As the chart below shows, the difference in ending portfolio values between perfectly timed annual S&P 500 contributions and the worst-timed contributions is only $300,000. But the difference between the worst-timed contributions on an annual basis into the S&P 500 and holding cash in short-term Treasury notes is almost $600,000.

Hypothetical Portfolio Value with $12,000 Annual Contributions (2000-2023 YTD)

Chart showing the hypothetical value of portfolios based on timing of contributions.

We are on much better footing than we were at this time last year (and even at the start of this year), from both a growth perspective and an inflation perspective. The S&P 500 is about 8% from its all-time highs.

We don’t know when the next shoe will drop, or what will cause it, but there are always opportunities in the market. Stocks remain long-term growth engines of investment portfolios. The chart below looks back over the significant news headlines of the last 23 years; if you were invested in 60% stocks and 40% bonds over that time frame, the cumulative return could have been over 300%.

Only one time period (2022) shows negative growth, and that was because there has not yet been enough time to recapture that loss. Staying invested through all the bad news — and not timing the market — remains the best strategy.

Investment Portfolios Are Built to Last

U.S. 60% equity, 40% fixed income portfolio returns, %

Chart showing how portfolio income has performed from 1999 to 2023. — Sources: J.P. Morgan Wealth Management, FactSet. [1] Cumulative total returns for the 60/40 portfolio (S&P 500 and Bloomberg Global Aggregate Index) are calculated from Dec. 31 of the year prior until the updated data. Data as of June 20, 2023.

From a portfolio-management perspective, we continue to look ahead. The markets are forward looking, often telling us what may happen ahead of time. We are watching for the most anticipated recession in history. At the same time, the underpinnings of the new bull market seem to be alive and well.

Housing is making a turnaround, and that is positive for the economy. Inflation continues to show signs of weakening. With an eye on the future, we are making the following portfolio changes as we start the third quarter:

• Over the last year and a half, we have maintained a shorter-duration fixed-income portfolio, as the Fed has been actively raising rates. The portfolio benefited as the very short end of the yield curve (one year and less) saw higher interest rates. The longer-dated maturities and end of the yield curve have continued to yield less than the short-end (inverted yield curve). The Fed paused in June from raising interest rates, after 10 consecutive rate hikes.

There is a possibility of another one or two interest rate hikes, but we believe most of the change is already accounted for in the bond market. Since we are near the end of the Fed raising rates, we are extending the duration of the portfolio and removing our short-duration position. With this strategy, we are able to increase the overall yield of the fixed income portfolio to be well positioned for when the Fed decides to reduce interest rates — and to capture capital appreciation as well.

• For the month of June, we started to see more stocks participating in the rally that has been dominated by mega-cap technology names since the start of the year. More than 10% of stocks in the S&P 500 hit a new 52-week high last week, the most since March 2022. As seen in the chart below, other indexes for the month of June are outperforming the S&P 500. With the broadening of the market rally, we are adding an equal weight S&P 500 position to go along with market-weight S&P 500 exposure to provide a more balanced large-cap growth and value mix while reducing exposure to heavily weighted dividend stocks.

In June, the Rally Is Broadening Out Beyond Tech

Month-to-date price return, %

Chart showing how the market rally is broadening beyond the tech sector. — *Source: Bloomberg Finance L.P. Data as of June 22, 2023.*

As we enter the second half of the year, the market will be closely watching to see if a recession unfolds, caused by additional interest rate hikes, stubborn inflation and any remaining effects of the banking crisis. The expectation is that the recession would be mild, lasting one or two quarters and bringing a decline in corporate profits.

Although money market yields continue to provide a nice return now, they will not last forever. We do not know how much, if any, of a potential recession is priced into the markets today, but the portfolio changes we are making are looking past 2023 and are focused on an improving economy in the years ahead.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Bloomberg, Goldman Sachs, JP Morgan

Promo for an article titled 2023 at the Halfway Point: Where We've Been and What Lies Ahead.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

2023 at the Halfway Point: Where We’ve Been and What Lies Ahead

As we approach the second half of the year, it’s a good time to look back at the trends that have shaped our economy so far. Inflation continued to ease each month, and U.S. economic growth slowed. The Fed continued to raise rates while signaling that we are closer to the end of the rate-hike cycle, and the U.S. government debt-ceiling standoff was resolved without a default (thankfully).

Artificial intelligence was the talk of the stock market for the first half of the year, and as we have written before, mega cap stocks led the market higher, with seven stocks accounting for most of the return of the S&P 500 through June.

Big Tech’s Performance vs. the Rest of the S&P 500

Through June 1

Chart showing that seven tech stocks account for most of the return of the S&P 500 through June. — *Sources: FactSet, Goldman Sachs Global Investment Research*

As we wrote last week, the stock market has rallied by more than 20% from the bottom in October 2022, and a new bull market has begun. Dating back to 1928, the S&P 500’s average return has been 7% over the six months after a rally of 20% follows a drawdown of 20% or more (like we saw during the first nine months of 2022). That is significantly higher than the average rolling six-month return of just 2.9%, as seen in the chart below. These findings suggest the possibility of further gains from here.

Drawdown Recoveries: What Happens Next?

Chart showing that the S&P 500’s average return has been 7% over the six months after a rally of 20% follows a drawdown of 20% or more, higher than the average rolling six-month return of just 2.9%.

Fixed income markets were positive for the first half of the year. Short-term yields, money markets, CDs and Treasury bills continued to offer attractive rates not seen for many years. Last week, the Fed kept the Fed Funds rate unchanged, ending a streak of 10 consecutive increases going back to March 2022. However, bank officials were quick to point out that the tightening cycle is not necessarily over.

“Allowing inflation to get entrenched in the U.S. economy is the thing we cannot allow to happen for the benefit of today’s workers and families and businesses, but also for the future,” Fed Chairman Jerome Powell said.

The Fed’s new summary of economic projections indicates that there still could be two more rate hikes to come. The question is whether the Fed is posturing and hedging its bets, as inflation fell again in May to 4%, still above the Fed’s target 2% level. It also is important to remember that it can take time for Fed rate hikes to work their way through the economy, often 12 to 18 months.

Here are some of the key indicators and trends we are watching for the second half of the year:

Leading Economic Index (LEI)

Used to predict the direction of global economic movements over the next few quarters, this index is comprised of 10 components whose changes tend to precede changes in the overall economy. There is still much discussion on a potential recession in the second half of the year — or whether one can be avoided altogether.

Labor market

The unemployment rate is 3.7%, remaining near its all-time low but up slightly from its recent measure of 3.4%. For inflation to fall to its 2% target, the Fed needs to see continued weakening in the labor market and slower payroll growth.

Credit crunch

Lending standards have tightened with higher interest rates and the effects of the Silicon Valley Bank failure. This may affect corporate earnings, which could lead to downside in the S&P forecast. There also is concern about the commercial real estate market, as a tremendous amount of debt needs to be refinanced this year. With interest rates still high, we could see a record level of default on commercial real estate property.

Market breadth

As we wrote last week, we have started to see sectors other than mega-cap tech names beginning to rally. Technology had been the only sector with positive returns, but in June, we are seeing other sectors turn positive. A continued improvement in other sectors would bode well for the market during the second half of the year.

Artificial intelligence

The first half of 2023 was all about ChatGPT and anything affiliated with artificial intelligence. Enthusiasm is elevated, and market valuations for some AI stocks are frothy as concerns about a repeat of the tech bubble of 2000 are starting to surface based on the first-half run of technology stocks.

+++

The second half of 2023 may hold the potential for fewer surprises with a debt-ceiling deal in place until 2025, global central banks moving towards a pause on rate hikes, signs of potential U.S. and China tensions cooling, and bank stress stabilizing. We will continue to closely monitor the markets and adjust the portfolios as necessary.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: FactSet, Goldman Sachs, Horizon

Promo for an article titled A New Bull Market Has Begun — Here's What Investors Should Know.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

A New Bull Market Has Begun — Here’s What Investors Should Know

The S&P 500 officially entered bull market territory last week, closing more than 20% higher than its low on Oct. 12, 2022. For now, the 2022 bear market is over.

The stock market has inched higher as the economy continued to surprise while inflation has cooled. Inflation, measured by Consumer Price Index (CPI), has slowed for 11 consecutive months. In May, prices rose at the slowest annual pace since March 2021.

New lows have happened just two times after stocks gained 20% off the bottom: the global financial crisis of 2007-2009 and the tech bubble of 2000-2002. The average return 12 months after the end of a bear market was 17.7%, as seen in the chart below.

A New Bull Market Should Have Bulls Smiling Very Soon

New bull markets start (20% off bear lows) and what happened next for the S&P 500

Chart showing S&P 500 returns after previous bull markets. — *Source: Carson Investment Research, FactSet 5/4/23. A new bull market is 20% off the previous bear market low. @ryandetrick*

The duration of a bull market has varied significantly. Historically, bull markets have averaged 39.4 months and have produced an average gain of 130.1%. If you exclude the Great Depression, the average bull market has lasted 51 months and produced an average gain of 147%. We are now eight months into the current bull market, starting at the October low.

S&P 500 | Duration & Performance of Bull Markets (1929-YTD)

Chart showing the duration and performance of bull markets since 1929. — Sources: LPL Research, Bloomberg 6/8/23. Past performance is no guarantee of future results. All indexes are unmanaged and can’t be invested in directly. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of the predecessor index, the S&P 90.

* Ongoing

We still would like to see more breadth in the market, meaning more sectors other than technology participating in the rally. Big Tech gains have been driven in part by investor enthusiasm for the rise of artificial intelligence. ChatGPT has become the fastest-growing consumer app in history. Last week, we started to see other sectors gain momentum, as small-cap and international stocks also began to rally. The seven biggest stocks (Apple, Amazon, Google, Meta, Microsoft, Nvidia and Tesla) gained 77% this year through the end of May, while the average stock in the index is down 1.2% over the same time.

In or Out?

Three sectors have generated most of the S&P 500’s returns this year.

Chart showing how market sectors have performed this year. — *Data through June 8. Source: Bloomberg.*

The declining dollar has helped international companies, as other currencies have gained compared to the dollar. Since October, the dollar has declined 6% as measured by the J.P. Morgan USD Real Effective Exchange Rate Index. At the same time, investors have continued to shift assets from stocks and bonds into money market funds. Money markets reached a record level at over $5.39 trillion in late May. This flight to cash has been understandable following last year’s decline of both stocks and bonds as well as higher interest rates.

Many investors moved monies from banks to money markets among higher yields on cash alternatives. When cash starts to unwind and move back into stocks and bonds, as it did after the global recession and pandemic, markets may be able to move even higher.

Investors’ Flight to Cash Has Been Followed by Strong Returns

Chart showing returns after investors moved money into money market funds over time. — *Sources: Capital Group, Bloomberg Index Services Ltd., Investment Company Institute (ICI), Standard & Poor’s. As of 5/26/23. Past results are not predictive of results in future periods.*

This doesn’t mean a recession is out of the equation. The Fed has raised rates from 0% to 5% over the last 15 months. These rate hikes are being felt throughout the economy, and we will continue to feel them. It typically takes 12 to 18 months for rate hikes to work their way through the system.

A possible recession doesn’t mean that the market must collapse. Remember, markets are forward-looking, and investors are still positioned for the worst. The biggest risk to the market remains the Fed. Even if the Fed pauses rate hikes in June, it still could resume raising rates in July, possibly by as much as another 50 basis points. The hope is that such a move would ultimately be the last rate hike, but we will continue to follow this closely, as persistent inflation could upend the Fed strategy and the market rally.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Barron’s, Carson, Capital Group, U.S. News

Promo for an article titled More Than 100 Days Into 2023, What's the Outlook for Investors?

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

More Than 100 Trading Days Into 2023, What’s the Outlook for Investors?

The second half of 2023 is fast approaching, and it may hold the potential for fewer surprises now that we have a debt-ceiling deal in place until early 2025. At the same time, global central banks are moving toward a pause in interest-rate hikes, and signs of potential U.S.-China tensions are cooling. That doesn’t mean that the markets don’t have anything to worry about — the ongoing war in Ukraine, stronger inflation than the Fed would like, an expected decline in company earnings, a likely recession in office real estate and potentially residential real estate, and worries that tech stocks, specifically those focused on AI, are in a bubble.

We feel confident that over time, stocks will make new highs yet again, just as they have for the last 100-plus years. The chart below is an interesting reminder that over the last 122 years, the U.S. economy tends to win in the end, despite tough market conditions. The chart measures the Dow over time and considers recessions, market corrections, wars and other news events. The chart’s strong upwards line to the right shows that over the long term, stocks have gone up, despite short-term setbacks and road bumps.

Dow Jones Industrial Average: 122 Years of (Mostly) Bad News

Graphic showing 122 years of Dow Jones climbing during turbulent times. — *Source: Brouwer & Janachowski, Copyright @Factset Research Systems Inc.*

We are now more than 100 trading days into the year. The S&P 500 was up 8.1% through the first 100 days. A good start to the year historically has suggested continued movement higher. When stocks have been up more than 7% during the first 100 days, the rest of the year has been up 89% of the time — and has added another 9.4% on average.

There’s no doubt that a big part of the performance during the first half of the year is attributable to the “Magnificent Seven,” as Jim Cramer has coined them: Apple, Amazon, Google, Meta, Microsoft, Nvidia and Tesla. Through the end of May, the top 10 largest stocks in the S&P 500 had an average return of 9%, while the other 490 stocks in the index returned -4%. (Remember that past performance is no guarantee of future performance.)

Stocks Up Big as of Day 100 Could Mean More Green

S&P 500 YTD >7% on Day 100 and what happened the rest of the year

Chart showing returns of the market in years when the market is up 7% or more after 100 trading days. — *Source: Carson Investment Research, FactSet 5/25/2023 (1950-current), @ryandetrick*

Historically, June can be a weak month for stocks; earnings season is over, and the summer doldrums have begun. The S&P has gained only .03% on average, but as the chart below shows, June gains have been 1.2% on average when stocks are up more than 8% this time of year.

June Isn’t Always Weak for Stocks

S&P 500 performance in June, from 1950-present

Chart showing S&P 500 action in June from 1950 to today. — *Source: Carson Investment Research, Factset 5/31/2023, @ryandetrick*

While the first half of the year has been a good start for stocks, there are still multiple reasons to look forward to a positive second half of the year — and to avoid the recession talk that seems to have mitigated after strong job numbers last week.

As we head into the second half of the year, we will be watching the impact of higher interest rates on the consumer and real estate, inflation and how the Fed handles interest rates, and the reopening of China’s economy. The economy has not fully felt the impact of last year’s interest rate hikes and the possibility remains for an additional rate hike or two this summer.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Brouwer & Janachowski, Carson, Fidelity, Schwab

Promo for article titled Before You Sell for a Loss, Make Sure You Know the Wash-Sale Rule.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

What’s In the Debt-Ceiling Deal, and What Happens Next?

On Wednesday, the House of Representatives approved The Fiscal Responsibility Act, the deal President Biden and Speaker Kevin McCarthy reached over the holiday weekend to raise the debt ceiling. The measure now goes to the Senate, which could approve it before the weekend.

Treasury Secretary Janet Yellen has said federal funds could run out by June 5 unless Congress acts to raise the debt ceiling. As we have written before, this is not the first time this issue has been a matter of contention; in fact, a split Congress like the one we have now has agreed to increase the ceiling 24 times before.

Increases to the Debt Ceiling Under a Split Congress Are Normal

How many times the debt ceiling increased based on the makeup of Congress (1959-present)

Chart showing debt-ceiling increases by Congressional party. — *Source: Carson Investment Research 5/6/2023, @ryandetrick*

What’s in the bill?

• Debt limit extension to 2025: The core of the deal is a suspension of the debt ceiling until Jan. 1, 2025, after the next presidential election. If it’s necessary at that time, the Treasury Department can again use extraordinary measures to pay the bills for months.

• Spending limits: The agreement includes spending caps for the next two years. In fiscal 2024, it would limit military spending to $886 billion and nonmilitary discretionary spending to $704 billion. In fiscal year 2025, those numbers would both increase by a moderate amount. Most importantly, there are no cuts to Social Security or Medicare.

• Student loans: The deal ends President Biden’s freeze on student loan repayments by the end of August and restricts his ability to reinstate such a moratorium. Borrowers will be required to resume paying their student loan bills 60 days after June 30.

• Other cuts: The bill would rescind about $28 billion in unspent COVID relief funds. It also would eliminate $1.4 billion in IRS funding.

What happens next?

The Democratic-controlled Senate will consider the bill and could vote on it before the weekend. If the bill fails, the U.S. would be in threat of immediate default with less than a week remaining until June 5. Even if the bill passes, it is possible that the U.S. debt rating will receives a downgrade, like we saw in 2011.

From a stock market perspective, the deal in its current form does not include enough spending cuts to tip the economy into a recession, nor does it add enough spending to increase inflation worries. The chart below shows where the S&P 500 was trading 90 days before and after the “X” date in the last 11 debt-ceiling crises. In all but two instances, the S&P was higher 90 days later. This reiterates our stance against trying to time the market, instead staying invested for the long-term.

On Average, Stocks Moved Higher After Past Debt Crises

In most cases, stocks gained both before and after a debt-ceiling crisis was resolved; 2011 was an unusually volatile example.

Chart showing stock market performance before and after a debt-ceiling crisis.

The markets and the economy are likely to avoid an enormous crisis. There are two plausible scenarios going forward – either the imminent passage of the bill, or a failure to pass the bill, leading to a market correction and then quick passage of the bill. Either way, the debt ceiling will get raised and default will be avoided.

That does not mean that the U.S. credit rating will avoid a downgrade. If that were to happen, the markets could see a repeat of 2011 — and as seen in the chart above, even after an agreement was reached, the market sold off almost 20% from its peak.

It is important to remember that it is hard to say exactly when everything will be resolved and that as part of the planning process, we plan for the unexpected. A default or downgrade could usher in a period of increased market volatility. If that were to play out, we will continue to discuss what we can control in times like these, which is our emotions, and not what happens in Washington. We will continue to follow the long-term investment plan.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Bloomberg, Carson, Fidelity

Promo for an article titled The Importance of Compound Interest and Tax Planning on Your Portfolio.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Where Do Negotiations Stand as the Debt-Ceiling Deadline Approaches?

With a week left until the June 1 debt-ceiling deadline, the president and congressional leaders have been negotiating to raise the ceiling and enact some hopeful budget reforms. As we all know, Congress often waits until right before a deadline to take action, but that doesn’t mean there won’t be angst and potential volatility in the markets as we get closer to the deadline.

A default or funding delay in the U.S. Treasury market would have global impacts. As the map below indicates, few nations have a debt ceiling similar to the United States. Our Treasury market is the deepest and most liquid of any nation in the world and a central component of the global financial system. Over the past 22 years, the U.S. has needed to increase the debt ceiling 22 times. Denmark, the only other developed country with a debt ceiling, has increased only once, and it did so out of precaution, not necessity.

World map showing the countries with a debt ceiling, including the United States. — *Source: Charles Schwab, created with mapchart.net as of 5/12/23*

We knew coming into 2023 that the two parties would have a standoff over the debt ceiling. We have a divided government and deteriorating fiscal environment. Since January, when the debt ceiling was first breached, the U.S. Treasury has been using extraordinary measures to avoid breaching the debt ceiling.

Spending has increased this year due to higher interest costs and larger payments tied to inflation; those of you who are on Social Security can attest to the nice increase in your monthly payment. At the same time, tax revenues have fallen 6% over the last year, causing the debt ceiling date to be moved up from late July or early August.

What does each party want from the negotiations?

House Republicans are calling for a cap on discretionary (nonessential) spending, rescinding unspent COVID monies and energy-permitting reform. In exchange for those items, they are willing to raise the debt ceiling. Democrats are calling for “clean” legislation, an increase in the debt ceiling without any policy provisions or conditions attached. They do not want spending cuts, especially to Medicare or Social Security, and neither side politically can afford to cut those two government provisions.

Republicans have passed a bill out of the House that would raise the debt ceiling but would also mandate $4.8 trillion in spending cuts. As of now, this bill does not have the votes to pass the Senate. The most likely outcome is a cap on discretionary spending and pulling back in unspent COVID dollars. The biggest discretionary spending item is defense spending. The White House has proposed keeping this flat from fiscal 2023 to 2024 and then a 1% increase in 2025. The chart below shows the impact of proposed curbs on discretionary spending in dollar terms.

Discretionary Spending

FY, Billions of dollars

As we get closer to the deadline, most economists and political talking heads are anticipating this turning into a two-step process. The first step would provide a short-term debt ceiling increase. The second step would fill in details and would be paired with another increase in the debt ceiling to get past the 2024 presidential election. While it feels like we are in unchartered territory and Congress has never been this acrimonious, we have been here before. As a matter of fact, Congress has been able to come to a resolution 78 times in the past 63 years.

The political debate is about how to raise the debt ceiling, not whether to raise the debt ceiling.

The actual threat of a default of the U.S. debt is extremely low. It is important to know that the deadline is not the same as the default date. The U.S. Treasury is expected to have a small cushion of funds on June 1 that should provide several additional days of breathing room.

On June 15, the Treasury department has a large tax collection from quarterly payments. This may be more akin to a government shutdown, where the Treasury would have to prioritize other government spending but would have enough funds for Medicare, Social Security, defense, etc. We are entering a period of fiscal restraint and austerity compared to the last few years, as we have become accustomed to the environment of fiscal stimulus and cutting taxes.

It is more important than ever to focus on what we can control at times like these. We shared this illustration last week, but it is worth repeating. What drives market returns is the right side of the seesaw: time in the market, controlling your behavior, savings rate and asset allocation.

What Drives Investment Returns

Illustration sharing the idea that time, behavior, savings rate and asset allocation are the factors that drive investment returns.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Baird, Fidelity, Schwab

Promo for article titled Here's What Investors Should Know If Congress Doesn't Raise the Debt Ceiling.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.