The Weight of the Evidence
TLA continuously researches and monitors economic and market trends on behalf of the families we serve. The weight of the evidence informed us to be defensive over the past 18-24 months and we remain so.
Long-term observers recognize that market economies ebb and flow from periods of expansion to periods of contraction and then back to expansion. Anyone who has tried to argue in decades past that “this time is different” has been wrong.
The data we observe now is quite mixed. The major headline scare of the first quarter, that of the banking system, has all but disappeared. The handful of bank failures seems to be confined. That was followed by overly optimistic expectations that the Fed would soon lower short-term interest rates. That seems unlikely. Federal Reserve Chairman Powell has been clear that the Fed will not rest until they tamed inflation with even tighter monetary policy. We do not plan to “fight the Fed.”
The markets have been bolstered recently by the resolution of supply chain issues and the concurrent cooling of inflation. Employment growth has been stronger than almost anyone expected, but may now be slowing. The combination of cooling inflation and a strong employment picture has meant that real wage growth, especially for those in the lower economic spheres, has been rising. That’s been good for GDP growth, but we’ll have to wait and see what that means for corporate profits in the future.
After a poor showing in 2022, the most extreme and speculative markets excelled in the first half of 2023. We remain concerned that the narrow market leadership in the first quarter has, in fact, accelerated further in the second quarter. A healthy market typically has broad participation. Instead, what we see is that the top 7 mega-cap technology stocks have accounted for 75% of the S&P 500’s growth this year. Historically, this is unsustainable. These companies and their speculative non-stock cousins are the most vulnerable to market correction.
We therefore remain cautious with a higher-than-normal level of high-yielding short-term, government-backed issues in our portfolios.
