John Wickliffe
Associate Portfolio Manager

No, this is not a wedding invitation or formal business letter, I am just adding a little respect to a day we have all been waiting on for 455 days; a Federal Reserve meeting which ended without a single rate increase.

Over the past 15 months, the economy endured the steepest collection of interest rate hikes since 1980. Because it takes the economy around 12 months to feel the true impact of rate increases, inflation continued to climb right alongside interest rates, causing quite a burden on the consumer. As the title of this newsletter implies, we might not be out of the woods just yet.

During that meeting, we learned that a majority of Fed members believe that two more rate hikes are necessary to finish the fight on inflation. While the news was somewhat disappointing, producing an actual timeline helped remove a sense of uncertainty we have all been dealing with since the first 25 basis-point rate hike in March of 2022.

As the second quarter began, investors were able to, for the most part, place the largest bank failures since 2008 in the rear-view mirror. They returned to combing through every single piece of economic data that may or may not tip the hand of Federal Reserve Chairman Jerome Powell. However, this time instead of hitting the panic button when the economy adds more jobs than originally surveyed, the possibility of finally reaching the finish line won the day. The S&P 500 entered bull market territory on June 8, returning 20% since its most recent lows on Oct. 13, 2022. For the quarter alone, the index finished up an impressive 7%, while the Dow Jones closed up 2.5% and the NASDAQ, thanks to a little help from the promises of Artificial Intelligence, advanced more than 13%!

We would be remiss not to note that the equity market rally has not been broad based to date, with a handful of growth-orientated companies contributing to more than 66% of the S&P 500’s gains this year. With this in mind, although the overall valuation for domestic large cap stocks is above average, we are still finding value in many sectors that have not participated in the rebound so far.

On the fixed income side, yields rebounded as regional banks found assistance both from the public and private sectors. This backstop, along with the idea that the most recent bank failures had more to do with the individual banks themselves instead of the spike in interest rates, removed most probability that we will see a cut in the Fed Funds rate by the end of the year. Along with a 25 basis-point rate increase in May, and the potential for two additional rate increases throughout the remainder of 2023, yields jumped across the board. The 10-year note climbed 40 basis points to 3.84% and the shorter-term, 6-month T-bill finished at 5.48%, its highest mark since 2001.

The economy continues to defy financial market pundits, consistently beating expectations, including a multi-generational solid jobs market. Tempering these data points is our concern around how the banking industry responds to a shrinking low-cost deposit base over the next several quarters. We have already seen lending standards start to tighten up, which typically precedes a slowdown in business activity.

James Fereday
Chief Investment Officer

Given the economic dynamics described above, we remain cautiously optimistic from an investment strategy standpoint. Our team increased cash positions during the past six months, took profits in some of our large cap stock domestic winners, and continued to add to bonds where we are seeing the best risk/reward for yield in 10-plus year. As mentioned above, we have also found some good opportunities in well-managed companies, still trading close to 2022 lows, with historically appealing valuations and strong cash flows.

We wish you well for the rest of the summer and look forward to reconnecting with our clients in the second half of the year. As always, please feel free to reach out to one of your WealthSouth advisors should you have any questions or comments.