Quarterly Commentary: 2023 Mid-Year Update


The first half of 2023 provided investors with plenty of headlines to digest—from a mini-banking crisis to a continuation of rising interest rates, and Congress taking the debt ceiling debate down to the wire. Despite these headwinds, markets rebounded from their worst year since 2008, with the S&P 500 returning to a bull market (up over 20% since hitting bottom in October 2022).  Inflation fell dramatically from last year’s peak, employment data has remained mixed, and the Fed finally paused after a year of aggressive upward moves. Once inflation was proving to be more than “transitory,” the Fed went on a rate-raising campaign increasing rates an unprecedented 10 times since March 2022 with the target range now sitting at 5.00% – 5.25%.  While the Fed paused in June, Fed Chair Powell does not want to see a resurgence in inflation by declaring victory too soon, so they stand ready to resume rate increases based on ongoing data. As of the June print, CPI stands at an annual rate of 3.0%. 

Last year, investors witnessed one of the worst bond market environments in history, contributing to portfolio malaises rather than providing stability as equities declined. Yet, in 2023, the Fed’s cumulative action has resulted in significant increases in investor cash flows from fixed income, and relative price stability as markets anticipate the end of the Fed’s recent campaign. Rates at the short end of the yield curve have gone from under 0.5% to over 5% in a year! As these higher yields are integrated into fixed-income vehicles, this will provide a welcome reprieve for fixed-income investors, especially those seeking regular income from their portfolios.

In the U.S. equity markets, we continue to observe asset class rotation in response to dynamic economic and market information.  Value and small-cap equities, which shined in 2022, started the year strong, but large-cap growth stocks overtook them in the second quarter when Artificial Intelligence (AI) captured investors’ attention. On the global front, we are seeing a divergence in economic paths that have helped international stocks, a trend we believe could continue. Over the last 12 months, positive earnings surprises in Europe and parts of Asia have helped developed, international stocks keep pace with their U.S. counterparts.

1 Year
S&P 500 Index8.7%16.9%19.6%
Russell 2000 Index5.2%8.1 %12.3%
MSCI EAFE Index3.0%11.7%18.8%
MSCI Emerging Markets Index0.9%4.9%1.8%
Bloomberg US Aggregate Bond Index-0.8%2.1%-0.9%
For informational purposes only

The U.S. economy has remained remarkably resilient in the face of the Fed’s rate policy, yet there are signs of an economic slowdown or even recession as the Fed seeks to tame inflation at all costs. Many areas of the manufacturing sector have been in contraction, and housing activity has been under pressure not only from significantly higher mortgage rates and limited supply, but from skyrocketing home prices from pandemic-induced zero rate monetary policy. Yet, we never underestimate the power of the U.S. consumer who has gone from voraciously buying goods during the pandemic with extra cash from government stimulus to craving services such as dining out and travel in the post-pandemic economy.

The Magnificent Seven

Market performance in U.S. equities so far in 2023 has been highly skewed by the performance of a handful of large technology stocks in the S&P 500 index that have been dubbed “The Magnificent Seven.” The following chart shows the dramatic effect they had on the Index’s performance year to date. As the chart will also reveal, this same group of stocks suffered extreme downside volatility last year. GOOG, AMZN, TSLA, and Meta are still down double digits if you include last year’s performance, and MSFT is essentially even.

StockTickerS&P 500 Weighting*YTD Return
2022 Return
Apple IncAAPL7.7%49.7%-26.4%
Microsoft CorpMSFT6.9%42.7%-28.0%
Alphabet IncGOOGL1.9%35.7%-39.1%
Amazon.com IncAMZN3.1%55.2%-49.6%
NVIDIA CorpNVDA2.8%189.5%-50.3%
Tesla IncTSLA2.0%112.5%-65.0%
Meta Platforms IncMETA1.8%138.5%-64.2%
For informational purposes only

The occurrence of market phenomena like the Magnificent Seven happens in markets quite frequently, albeit sometimes less conspicuously. We witnessed the same thing with the FANG stocks (Facebook [now Meta], Amazon, Netflix, and Google [now Alphabet]), a term coined by Mad Money host, Jim Cramer in 2013, revised in 2017 as FAANG to include Apple. In the Roaring Nineties, we had the “Four Horsemen” – Microsoft, Cisco, Intel, and Dell. In each case, these stocks dominated the broader markets, that is, until they didn’t.  As with any concentrated portfolio, it typically has its day in the sun, and the markets move on to greener pastures, sometimes rather abruptly.

We are not suggesting that stocks in these groups are to be excluded, quite the contrary, our portfolios certainly participate in them. However, the old maxim “better to be lucky than good” seems to get in the minds of some investors turned gamblers. These folks willingly ignore skill which can be developed and applied with discipline in favor of luck over which they have no control. Chasing hot stocks or attempting to time markets would hardly be appropriate for Wealth Dimensions Group. As prudent asset allocators informed by the financial planning process, we accept the fact that in any given market period, there will be individual stocks, sectors, asset classes, or some combination thereof that contribute disproportionately to market performance over shorter periods of time. However, over the long run, there is compelling data to suggest that prudent diversification can reduce volatility while our investment tilts seek higher expected returns than the broad indexes, especially with disciplined rebalancing.

Soft Landing or Stagflation?

As we head into the latter half of 2023, the outlook for monetary policy and the potential for recession will be key for markets. As long as inflation remains in check and the employment rate is healthy, perhaps the Fed will pull off the “soft landing” they have sought to orchestrate. We remain cautiously optimistic for this outcome but are braced for something less desirable if monetary policy proves to have been too aggressive or inflation more embedded and persistent.

At Wealth Dimensions, we continue to monitor the economy and the markets adapting our portfolios to seek to reduce volatility and capture opportunities as they present themselves. On the fixed-income front, we have remained on the short end of the yield curve using high-quality fixed income instruments. As long as the yield curve remains inverted, we are actually able to collect a higher yield than we would using longer-duration assets. For instance, two-year Treasury bills yield 4.73% while ten-year Treasuries yield 3.80%. By staying short, we are picking up an additional .93% of income. At some point, the Fed will reach the end of this interest rate cycle, so there is a debate as to when investors should change strategies by adding to duration to protect higher yields for longer. We will continue to monitor this situation and will take action when we deem it to be viable.

In equities, we remain broadly diversified and patient as we measure the wide range of potential economic outcomes in our future. During the pandemic, we employed some risk mitigation strategies to our portfolios, which we have been unwinding to seek more upside potential. We also continue our disciplined rebalancing protocol as areas of the market ebb and flow.

On The Move

It is hard to believe it has been seven years since we occupied our present space. As many of you know, we eventually added some adjacent space to handle our growth in the short run. We are excited to announce that are moving to the second floor of our existing building. Our new space will give us an opportunity to refresh our office and further enhance our tools and technology while providing an even more inviting environment for our clients. We have truly been blessed with a talented, dedicated staff, who together with our wonderful clients, have resulted in our continued growth and depth as a firm. We look forward to welcoming you to our new offices. Please stay tuned for updates as we approach our move-in date this fall.

Thank you for your continued confidence in our services.

– The Wealth Dimensions Team

The S&P 500® Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 large publicly traded companies in
the U.S.

The Russell 2000® Index is a small-cap stock market index that makes up the smallest 2,000 stocks in the Russell 3000 Index.

The MSCI EAFE Index is an equity index which captures large and mid-cap representation across 21 Developed Markets countries around the world, excluding the US and Canada.

The MSCI Emerging Markets Index captures large and mid-cap representation across 24 Emerging Markets (EM) countries.

The Bloomberg Aggregate Bond Index or “the Agg” is a broad-based fixed-income index which broadly tracks the performance of the U.S. investment-grade government and corporate bonds.

For informational purposes only. Not intended as investment advice or a recommendation of any particular security or strategy. Information prepared from third-party sources is believed to be reliable though its accuracy is not guaranteed. Opinions expressed in this commentary reflect subjective judgments of the author based on conditions at the time of writing and are subject to change without notice. For more information about Wealth Dimensions, including our Form ADV Part 2A Brochure, please visit https://adviserinfo.sec.gov or contact us at 513-554-6000. Please be advised that this material is not intended as legal or tax advice. Accordingly, any tax information provided in this material is not intended and cannot be used by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer.

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