07/2023 - Mid-Year Report
Full written article below.
I’m even more delighted than usual to report to the events of the last six months, and on the further progress of our long-term plan. But first, as I like to do, typically twice a year, the Core Investment Beliefs
Core Investment Beliefs
• You and I are long-term, goal-focused, planning-driven owners of broadly diversified portfolios of enduringly successful companies. As such, we act continuously on our plan, as opposed to reacting episodically to current events and conditions.
• We’re convinced that the economy cannot be consistently forecast, nor the market consistently timed. Because of this, our operating assumption is that our best chance to capture something close to the full long-term return of equities is to ride out their frequent, sometimes significant, but historically always temporary declines.
• These will continue to be the bedrock convictions that inform our investment policy, as we pursue your financial goals and objectives
Current Commentary
• After declining sharply for most of last year, the S&P 500 ended 2022 at 3,840.
• As the year turned, it seemed as if the economy might well be in a no-win situation. Either the Federal Reserve would tighten credit conditions enough to stamp out inflation, thereby plunging us into recession. Or it would relent, avoiding recession but permitting inflation to burn on. In either case, we were assured by the financial media (which is proving over and over again to not be trusted) that corporate earnings would surely decline significantly.
• Adding on top of this, the first half of 2023 added three new and potentially critical uncertainties: U.S. sovereign default, a wave of bank failures that seemed to threaten the banking system itself, and a renewed outbreak of fear surrounding the dollar’s status as the world’s reserve currency.
• Yet even with all this negative news and headwinds, the S&P 500 closed out the first half of 2023 (6/29/2023) at 4,396, up 15%. I’ll just repeat Peter Lynch’s timeless maxim: “The real key to making money in stocks is not to get scared out of them.”
• Everything that happened (and didn’t happen) in the first half of 2023 turned out not to matter much. What mattered was that together we chose not to react to the market, but to act on our long-term plans
• Staying invested, staying diversified, and staying disciplined with allocations, rebalances, and dividend re-investment have continued to work and my assumption is that it’ll continue to work.
Over the past year and a half, the faith and conviction of us as investors has certainly been tested, but holding to the investment beliefs continue to provide desired outcomes. Successful investing can fundamentally simple, but, it’s hardly ever easy.
If you’re reading this and thinking about someone you know and care for that might not have fared as well as you in this recent market season, please connect them with me. I enjoy working with you and would welcome the opportunity to offer the same level of thought and service to someone you care about.
Additional Data: Each month I get asked by clients what additional resources I’m looking at. Please hear me in stating I’m not trying to predict anything whatsoever, just some of the interesting data I’m watching. This month’s list of additional data points is really just an update from some of the prior months. I’m looking for continued trends, which at least currently, are continuing.
- Did We Just Hit Bottom? – Was my blog post from Nov 2022, where I make the argument that we may have hit bottom, who knows if I’m right or wrong, it’ll take another 12-18 months to know for sure. Regardless, since the date cited, the markets are up close to 17% (dates from 10/13/22 to 04/19/23 source: Yahoo Finance)
2. BLS.gov – (above chart) showing PPI 12 month percent change, notice the sharp decline, peak was in March 2022.
3. M2 Growth vs Inflation – This is something I’ve been commenting on for close to a year and a half. Yes, I’ve been in the camp that inflation is tied to M2. We won’t know if I’m right or wrong for another year or so, but I sure like what I keep seeing. Longtermtreands.net – The trend is continuing, lower M2 (black line) is now quite a bit lower and negative along with lower inflation (red line). M2 has fallen about 4% in the past 12 months.
4. Breakeven Inflation Rate - Federal Reserve – 5-Year Breakeven inflation rate is now 2.15%. When you study this chart, you’ll see it goes back to 2004.
5. Federal Reserve Balance sheet – For months the Fed was following through on it’s statement made in May 2022 of reducing the balance sheet by 47.5 billion per month in months June-Aug 2022, then reducing the balance sheet by 95 billion per month. But, just in the past month, you’ll see the balance sheet spike up by 300 billion with the new bank lending program.
Market Truths
1. The Stock Market cannot be consistently known or timed
2. The Economy (as you define it) cannot be consistently known or timed
3. Over the past 100 years, the market has returned 10.45% (with dividends reinvested). It’d be difficult for someone to achieve this return if they did not simply stay invested. Data Source
4. The average intra-year market decline is about 14% and the market drops 15% or more every 3 years. J.P. Morgan | American Funds
5. Investing in equities has historically been volatile, my guess is it always will be, however when you consider equities (using the S&P 500 as a proxy), Real Estate, short-term bonds and corporate bonds, over the long-term, equities continue to be the historical winner. To crystallize this point, just look for yourself NYU.edu.
Market Beliefs
1. Because the future cannot be known, we must embrace the belief that the world isn’t going to end during our lifetimes, and if it does, our money doesn’t matter
2. The world has continued to advance, since well before Jesus walked the earth, so assuming the world doesn’t end, it’s rational to believe the world will continue to advance
In closing: We of course cannot control what the market does from here and we cannot predict when the next market downturn will occur. But we can control our behavior to these outside events and continue to stick with our long-term investment strategy.
As always, thank you for your trust, if you have any questions/concerns please contact me.
David Hobbs, CFP®
Wealth Advisor | Owner
Hobbs Wealth Management
Standard & Poor’s 500 (S&P 500) - a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.
Russell 2000 – The index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
MSCI ACWI ex USA – The index measures the performance of the large and mid-cap segments of the particular regions, excluding USA equity securities, including developed and emerging market. It is free float-adjusted market-capitalization weighted.
Federal Funds Rate - refers to the target interest rate set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
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