Ep # 102: Mid-Year Investment Outlook 2023

Benjamin Haas |

A review of the first half of 2023: opportunities, risks, asset allocation, and highlights.  Join Ben and Adam as they reflect on the market during the first six months of this year and give their perspective on the investment outlook for the remainder of 2023. Here are some topics they cover in this episode:

  • The risk of a recession in Europe 
  • The Federal Reserve's strategy and response 
  • Asset allocation and rebalancing 
  • The importance of diversification 







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Full Transcript:

Benjamin Haas  00:02 

Hi everyone and welcome to A/B Conversations where we will help you CFP your way out of it. A podcast where you get into the minds of a couple of Certified Financial Planners on how we think and feel about everyday financial planning questions and what should really matter most to you. A healthier financial life starts...now! Hey Adam, thanks for jumping on. We've got an action-packed mid-year investment review here so I know there's a lot of content. Welcome aboard. Thanks for being willing to be in the driver's seat today. 


Adam Werner  00:40 

Oh, all right. I will certainly co-pilot with you. 


Benjamin Haas  00:42 

Sounds great but let's do it. We're halfway through 2023 after a very difficult 2022. Let's maybe look back on the first half. Where are we at? What are you seeing? What are you thinking?  


Adam Werner  00:57 

I think if we had to poll all of the people that we work with, ourselves included, how would the first half of 2023 have gone? If we did that poll, January 1, I don't know that any of us would have predicted the NASDAQ, the tech-oriented sector of the market would be up almost 40% in the first six months of the year and the S&P being up 16%. It's been an interesting start to the year for sure in a good way. There's been a lot of positive developments but there's some risks on the horizon or maybe even closer than that we're keeping an eye on and we'll kind of walk through some of those things that we're focusing on.  


Benjamin Haas  01:41 

Yeah, you often say it and I like the visual of this, the market is, of course, very capable of climbing this wall of worry. So, I think for, I don't want to say passive investors but those that kind of tuned into the news, like to kind of know what's going on. When you hear inflation, Fed rate hikes, bank failures. We know the politics of the debt ceiling debate not too long ago, geopolitics, all of that stuff can give us a lot of anxiety. We would think that when we hear these not-so-great things in the news that the market can't be doing well because of that so it's been an interesting six months for sure. 


Adam Werner  02:21 

Yeah, there's a saying for and I think it's more particularly for like day traders, people that are constantly moving in and out of the market, that the market can stay irrational longer than you can stay solvent. And that a lot of that feels true, like you just listed all of the potential headwinds. Yet, here we are with a very strong start to the year, it's why we believe in diversification and why we believe in just very philosophically fundamental building blocks of investments. You let time be on your side and this is just another I think, example of why you do that. You don't make big bets one way or the other because you can get caught when the markets moving in different direction than anyone probably believed it could go. 


Benjamin Haas  03:09 

Yeah, if you trust your gut, you'll probably be out of the market more than you're in it. Another indication of kind of how I would say the market is very different than the way that I've even personally been feeling. We follow the volatility index, which is just one measure of how the market is perceiving future risk and volatility in the market. If that's historically around 18, we're lower than 14 right now. It's as low as it's been, you know, since pre-pandemic. So, let's pivot. Let's go into some of the highlights from the year now that we've kind of level set on your emotions don't equal the market. What did we see from the first half of the year? 


Adam Werner  03:51 

We'll start with bonds because I think that was one of the biggest surprises for 2022.  We've talked about this at nauseam but people expect or they've come to realize that the stock market is going to be volatile in different periods of time. We're somewhat I don't want to say immune to that but we're used to seeing those larger movements. 2022 was a bad year for bonds, the worst in like 40 or 50 years or maybe ever. So we haven't seen this rapid response from bonds yet this year but that does somewhat make sense because we're still fighting this very similar circumstances from last year. It’s inflation, it’s Federal Reserve rate increases, and at what point is the Fed going to get to the other side of being able to not continue to raise rates, maybe start to cut rates at some point in the future when inflation comes down. That will bode well for bonds but all of that being said, depending on the area of the bond market they're up anywhere from 2 to 4% here in the first six months, which if that continues you annualized that out, are we before are we between 4, 6, 7 percent, that would be very normal bond expectations for us in this kind of new higher interest rate environment. So that's been a good development to start the year and as we talked about stocks are kind of off to the races. But that being said, it's in a very select group of the stock market that's really kind of leading the charge.  


Benjamin Haas  05:28 

Yeah, tech and communication specifically. You mentioned right at the beginning here, the NASDAQ, other different indices that you can follow, the NASDAQ being one that really got beat up last year for same reasons bonds. A lot of rate increases were not perceived to be good for those growth-oriented companies. So yeah, we haven't seen, I don't want to use the word market rep because that's maybe harder to explain. But if there are 500 companies in the S&P 500, we haven't seen a lot of them positive, even though the index is pretty high, simply because those biggest companies that you would know by name, they make up disproportionately a larger percentage of that index so it looks great. The S&P 500 says up 16% but how many companies are actually participating in that growth? It's not as many as we would like to see. 


Adam Werner  06:20 

Yeah, so the good news, it's starting to trend in the right direction that some of the companies that hadn't been doing so well to start the year are starting to kind of catch up to these bigger growth-oriented names. A good way that we compare that is you just look at the broad S&P 500 and what is that doing, then you compare it to what they have is an equal weight index. So we'll go back, is this like a 200-level course on indices. The S&P 500 is a market cap weighted index meaning take Apple for example, you've probably seen the headlines is now worth 3 trillion in market cap. Essentially, what that means is all of the shares of Apple stock outstanding, multiplied by the price of the stock today, and that gives you the total market cap of the company. It's worth $3 trillion. Well, the S&P 500 index is market cap weighted, so the bigger the company, the bigger percentage of the overall index, it becomes. So right now, I don't know what the exact statistic is but basically, the five largest companies in the S&P 500 make up more than a quarter, more than 25% of the index. So, it's one of those situations where, if Apple is doing very well and some of these bigger companies are doing well, that can kind of pull the entire index with it. But that doesn't necessarily give you a full picture of all the 500 companies within the index. Sometimes if Apple is up, that can kind of drag everybody up even though some of those other stocks may not be doing so hot. So, to be able to compare the S&P being up 16-17% or so year to date, the equal weight index is up about 6 to 7, closer to 7, at this point. Earlier in the year, the S&P was positive and that equal weight was negative. So that's why I'm saying we're kind of trending in the right direction that things are catching up. But it's still, I don't want to necessarily say it's a cause for concern. But when you have returns concentrated in a select group of companies, that could quickly turn the other direction depending on any outside influence, or you know, an event that happens in the markets or in the world. 


Benjamin Haas  08:36 

Yes, it goes back to that concept of kind of diversification and you don't want your whole portfolio to go as Apple goes. You want if we are to be moving into some sort of bull market now after having a very difficult 2022 hitting that bear market. We would love to see more participation in that. So, sticking with diversification that you kind of mentioned what's going on in bonds. We mentioned kind of what's going on in stocks. What about international year to date?  


Adam Werner  09:08 

Yeah, it's been interesting for international. It's different pockets doing better than others but broadly, International is doing quite well to start the year and a lot of that just has to do with part of it is central banks. So, like we have the Fed in the US but a lot of other countries or even in in Europe, they have the ECB that basically controls monetary policy across Europe and not just country specific. But essentially, they're in a very similar situation, interest rate hikes to try to combat inflation and there's a case to be made that, depending on the different economies across the world, some places may be slightly ahead of schedule than we are in the US, meaning they might be closer to being able to not continue to raise rates. It's still very difficult but the positive sign is international investments are starting to actually give us some return that we haven't really seen for the last decade or so when compared to the US. It's been if you hadn't owned international for the last 10 years and you purely owned US, you did okay. But at a certain point where we're starting to see that shift a little bit so we'll see how that continues to play out. But again, I think we're at least heading in the right direction. The one thing to note is, I think this is going back to the first quarter of this year maybe? Germany and I guess the parts of Europe, in particular, actually had a technical recession. They had two straight quarters of negative GDP growth. So that's another argument for why they may be able to come out of this quicker, maybe not necessarily quicker but before we do because they've already kind of seen some of that negative impact economically in their GDP numbers. Where we're still just kind of chugging along, in that we're still positive but we're in that 0 to 2% range of GDP growth right now. 


Benjamin Haas  11:18 

So then let's stay there. If we were to kind of pivot from, where have we come in these last six months, first part of the year? To now maybe what are the things that we're paying attention to or would want to speak to for these next six months? I kind of throw it back to you with the softball that I'll throw here. Still a lot of focus on the Fed and inflation. Yeah, and really are we going to be able to kind of, I don't want to say thread the needle because that makes it sound like it's almost impossible. But, maintain this balance between trying to make sure that inflation is not going to be runaway. Make sure the Fed doesn't have to raise too much higher, where it may add additional bank stress and we can talk to that. Because all of that may inform really the trajectory of stocks. What say you? What are we kind of looking at as risks or things to really pay attention to for these next six months? 


Adam Werner  12:11 

Yeah, I think the Federal Reserve is in a really tough spot right now. The June meeting, they didn't call it a pause. I don't know that they gave it a name. A lot of people were calling it a skip because it was a very weird kind of press conference, a very weird meeting minutes. It just didn't quite compute. It was a unanimous decision to not raise rates but then part of their predictions for the rest of the year or their projection, they're showing probably another half a percent of rate hikes. So, the logical side of my brain saying, well, if you think you need more than why wait, right, you're just kicking that can down the road. So, you have that kind of at play. Part of that may have just been to try to buy themselves time to see more data to see what inflation numbers will look like over the next month or two because the key point in that data, the inflation that they're looking at, the peak was last June, in inflation. Whatever we ended up at nine point something percent year over year inflation. Well, those huge inflation numbers from last year will now start to roll off. So just by that, from a data set, those higher inflation numbers will start to be replaced with more moderate inflation numbers and that will appear that inflation is slowing, without any more kind of influence from the Federal Reserve. It'll be interesting to see how the next few meetings shake out. I think you're more well versed in kind of looking at the Fed watch tool that's showing what is the market expecting from the Federal Reserve? I'm pretty sure July is still looking like they will raise rates another quarter point. But I'll kind of tie that back to the banking stress that we've seen. I think a lot of that has been subdued and there was a report last week or the week before that, the major banks, they kind of went through that stress test and they all kind of came out with flying colors, and the market has responded positively to that. But we just don't know if we're out of the woods yet from the banking stress for these more regional banks that are just overexposed to technology and have had other risk issues underlying. The worst-case scenario, I think, for the Fed and for the markets is if we do continue to see a domino effect of more banking issues and more stress because that's going to put the Fed in a spot where they may be reluctant to continue to raise rates to try to take some of the pressure off of banks, but if they do...Say that again? 


Benjamin Haas  15:02 

Even if they showed from their data. 


Adam Werner  15:05 

Right, they may just be choosing the lesser of two evils in that scenario. If we see any sort of uptick in inflation in that same scenario, where now the Fed has to take their foot off the gas to help banks and the banking system at large and inflation ticks back up, they're going to be in a very tough spot. You know, damned if they do, damned if they don't situation, where the market would react very negatively to that scenario. That's not our base case. We don't expect that to happen. But that is a risk that is out there that if there is more stress in the banking system, and depending what happens with inflation, and what the Federal Reserve does, that can certainly add a heck of a lot of volatility through the end of the year, if any of those things come to materialize. 


Benjamin Haas  15:54 

So, if that's the big risk? Again, maybe that's not the best case, per your comment. Is there good news and all of that? Is there opportunity in that? Or is there not enough of that good news or opportunity to be worth talking about it on a podcast here that we can look back on six months from now and say, oh, well, was that really good news or not? 


Adam Werner  16:20 

I'm not sure. So just thinking from a performance perspective, we talked about how 2022 was such a bad year for pretty much all risk assets, bonds included. Even if we...I'll put a pin in that side of things and just think about our economy in general. We said earlier, we're kind of still chugging along in that positive growth range right now. If we did see further slowdown in growth and maybe we do see something negative. Maybe it's later this year, maybe we're kicking that can down to 2024 at this point. All the data we've been talking about recession for how long now. So, it just keeps getting prolonged and prolonged and prolonged. There's a chance that if we do see a recession or we just see that continued slowdown and growth, the market will just take time to digest that. But from that standpoint, we wouldn't expect any quick move to the downside because it's been such a long time coming, that a lot of that gets baked in, right priced in before we would actually see kind of that negative data show up because it's always backwards looking. 


Benjamin Haas  17:34 

Right and I'm glad you said that because maybe we're leading to the recession where it sounds so negative and maybe that's a risk right now. But I think the point you're making, the good news is the market is meant to be very forward looking, right? A recession is an economic term and if you need to go back no further than the pandemic, the market was recovering a lot sooner than economically, we were recovering. We were still in shutdowns. So, we could be in that spot right now where economic data may be slowing down but the market being very forward looking, we're starting to see that push higher in anticipation that they call it a soft landing. That we're going to be able to kind of get ourselves in a spot where the Fed raises rates enough for inflation to kind of be back at where they want it to be, without really pushing the economy into a into a deeper, darker spot. 


Adam Werner  18:28 

Yeah and there's another saying it's: "Don't fight the Fed when it comes to investing." Even though they only have so many tools at their disposal, they can still clearly influence the market to the point that I'm not exactly sure how long ago it was, but there with that Fed watch tool that predictions on where the kind of market is expecting the policy to be on interest rates. That prediction tool was projecting interest rate cuts at the end of 2023. Now, you and I were having conversations like I don't see how we would get to those cuts without some sort of like economic need. A bigger recession that would cause the Fed to quickly change stance and we still think that's the case. By the way, those projections now on the Federal Reserve cutting interest rates are pretty much gone for 2023. Again, those now are kicked into 2024. But the point I would want to make and it's not just the Fed, it’s central banks around the world, that if at some point, even if there is a mild recession or we just see growth kind of eking along, like inching along, we don't expect the Federal Reserve to quickly come to the rescue in that scenario and quickly cut rates. The reason for that being because they're the ones trying to cause that slower growth to bring inflation down. So, I think better intently, that's a bit of a shift from what I think investors have been used to. When you see growth coming down or you see a recession, it's very common to see the Federal Reserve now cut rates to try to spur growth. But this is not, I don't want to say it's not a normal environment. But it's tricky for the Fed and for central banks around the world because they don't want to come to the rescue too quickly for something that essentially, they're causing for good reason to bring inflation down. I think that again, just kind of pushes out our expectations for kind of a fast rebound. Again, that's not our best case that we're just going to continue on the trajectory that we've seen here to start the year. It would not be surprising at this point to feel some sort of pause or some sort of consolidation or some sort of pullback from now to the end of the year. Maybe it's not prolonged, but just I think the market needs to take a bit of a breather after the first six months to kind of reassess where are we actually at and where are we headed? But I guess, let me pause there and take a breath. Is there anything you want to add to that? 


Benjamin Haas  21:13 

We get from a client perspective, I think the question is always going to be is there something looming that I should be seriously concerned about or that would inform you and I and the team here to do something different with portfolios? And I'm always worried that that word recession sounds like such a horrible thing. When if we think about the parts of the economy, when we think about the labor market right now, all we want to say is that if that word recession comes into play based on data, it doesn't have to mean that we need to do anything vastly different or that we should be uber concerned about that. So that's kind of the lighter side. The 100-level response to a lot of what you're giving us here and in great commentary. 


Adam Werner  22:01 

Well, so to that point, the cyclical parts of the market, the things that go up and down over time and aren't just kind of your steady defensive sectors. There haven't been any excesses. Nothing has been overextended, you go back to 2008 and the great financial crisis, and you had that big bust in the housing market because it was overinflated probably well beyond what it should have been in the first place. There's not really any evidence of that in sectors of the market right now and if there isn't the boom, then it's hard to see the bust to go along with the absence of that boom. From that standpoint, even if we do go into a recession, we don't expect it to be a huge kind of drawdown in the market. Again, it's all kind of been baked in a little bit to this point and I'll backup your point on the strong labor market right now, that's another reason why even if we saw a technical recession, it is still a historically tight labor market. The unemployment rate is still historically low and I don't know if it's in the notes here, but it was one of the calls I was listening to last week. Even though initial claims for unemployment have been kind of all over the place but I think those kinds of ticked up, the ongoing claims for unemployment essentially stayed the same. Which the way that data was interpreted or the way that I heard it was, yes, people are getting laid off but there's so many other jobs out there that people are able to quickly pivot down to another job. So that's a good sign for the economy and the labor market that if someone loses their job, will quickly go out and replace that. That doesn't usually lead to an economic collapse because ultimately, it's the unemployment and people being very hesitant to spend is what usually kind of drags growth down the quickest because consumer spending is such a huge component of GDP in America. 


Benjamin Haas  24:17 

Yeah, so maybe that's a good way to kind of transition this into them portfolio management. This is a financial planning podcast; it always will be. So, let's like kind of wrap up all this commentary with asset allocation and the point that you just made is one of those things to pay attention to. As you think about yourself, your consumption, how you're spending, if you're kind of seeing it in yourself, you're not doing anything vastly different then don't be fearful of your portfolio and that you need to tighten the reins either. We'd say stay the course, live your life. If we hear the recession word or the market comes back a little bit, we're not planning to do anything vastly different. Maybe we can talk about the rebalance word. Maybe we can talk about where you get opportunistic. If the market does pull back, isn't there a reason to actually be a buyer, not a seller? Sure. These are all themes that we talk about a lot but what would you highlight is kind of our take on asset allocation looking into these next two quarters to the end of the year?  


Adam Werner  25:19 

Yeah, I think given where we're at in the in the market and it's not just stocks, again, it's bonds. With interest rates kind of affecting bonds, still, our approach is to be fairly neutral. Again, we're not making big bets in any one area and the reason for that being number one, we just fundamentally believe in diversification, but also right now, it's really hard to know where things are going to go. By taking a neutral kind of standpoint, I liken it to the center fielder in baseball. You have to have a neutral stance, so that wherever the ball is hit, you can react, you're not leaning one way or the other. That's kind of how we feel right now with the investments that if we continue to see volatility, at some point. I shouldn't say that. If we see volatility pick up again later this year, there may be opportunities either to rebalance, again, to go kind of go back to your targets, depending on which area the markets are doing well and when. Or as you said, looking for those opportunities. If we do see some sort of pullback or a shock to the market, from who knows what influence, that may be the opportunity to now reassess how you're allocated and look to take advantage of what may be kind of that next bull market, I guess, even though technically the S&P is in a new bull market because it came off the 20% of the lows. Doesn't matter. Yeah, I think, kind of pivoting to now looking for opportunities moving forward. Albeit, it may be a little early to make those moves but now's the time to start thinking about how would we want to position if we do see growth continue to slow down. If we see a recession later this year, it still will move segments of the market and that may be the opportunity to make some transitions. But again, as we've said before, when it comes to our side of portfolio management and investment management, it's more like moving the dimmer switches than we are, you know, flipping the light on and off. But yeah, it's pivoting to now looking for maybe some more opportunities moving forward. 


Benjamin Haas  25:25 

And without a crystal ball. I guess my takeaway from that is, we don't know where things are going. It may get volatile again. There are risks on the table but pat yourself on the back, you've hung in there, it was a very tough year last year. Even if we do see volatility, we don't anticipate hitting those levels last year, those lows. So, in that case, we are looking forward, we're not looking in the rearview mirror, hang in there and long-term we certainly still feel good about where these markets are headed, however long it takes to get there and whether we hit that recession or not.  


Adam Werner  28:21 

One last, maybe not the last but another positive, money market mutual funds, right now, we're basically sitting on records amount of cash in the mutual fund market. So, if we saw any volatility or a big move kind of downside in the stock market, there is a massive amount of cash sitting idle right now and maybe it's not as idle as it once was. Cash is finally paying something and that's part of the reason these money market funds have grown as big as they have right now because interest rates have climbed. But there's something to be said for when there's so much kind of there, when there's so much cash just kind of sitting there waiting to be deployed. Market pull backs in that scenario, typically don't last very long because that cash gets put to work and pretty much props up the market. Because again, it's very forward so even if the environment in the moment doesn't feel good or look good, investors typically are looking beyond that and looking for that longer term growth. From that standpoint, cash sitting on the sidelines, by the way you're earning something sitting on some cash right now, is a good situation to be in that if we did see volatility or we did see a pullback, there's cash to be put to work across the board and that kind of limits the downside to stock markets. Assuming it's not a World War Three or nukes are flying. In any normal slowdown of growth and recessionary environment. 


Benjamin Haas  30:02 

I like it. I hope this was helpful. It was a lot to digest and while there was a lot talked about, I, again, hope that the benefit of the podcast is to just go back to the whole purpose of why you put an asset allocation together and philosophically how you think about investments. There's going to be good. There's going to be bad. There's going to be a lot of times where the market doesn't feel like it's making sense to you or me and that's okay. If you're able to kind of understand the purpose, understand diversification, understand that overtime, these things should work out, and if you can stay the course when headlines aren't kind. I will continue to be an optimist for the second half of the year. How about you?  


Adam Werner  30:16 



Benjamin Haas  30:16 

You have to balance me out? 


Adam Werner  30:52 

I'm not pessimistic on the second half. I just think, at this point, particular. Yes, I think people are seeing the returns from the first half of the year and thinking this is great. I hope it continues. I want to recoup everything that I lost in 2022. I don't think that's going to happen. I don't think we're going to just hit all-time highs again by the end of the year, but we certainly will take what we can get when we can get it. Right. The market has been good to us these last few months and even if we did see a pullback, like all the other times before it, we anticipate that being temporary and we'll be back on the rebound at some point moving forward. 


Benjamin Haas  31:31 

When in doubt, zoom out. All right. Thank you for all the help here.  


Adam Werner  31:36 

Thank you.  


Benjamin Haas  31:37 

Appreciate you leading the charge.  


Adam Werner  31:39 



Benjamin Haas  31:41 

Till next time.  


Adam Werner  31:42 



Benjamin Haas  32:00 

Hey everyone, Adam and I really appreciate you tuning in. Please note that the opinions we voiced in the show are for general information only, and are not intended to provide specific recommendations for any individual. To determine which strategies or investments may be most appropriate for you, consult with your attorney, your accountant and financial advisor or tax advisor prior to making any decisions or investing.  Thanks for listening! 


Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice. 


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