Adviser Outlook, Second Quarter 2023 Quick Takes StocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. gained in the first quarter even as the Federal Reserve continued to raise interest rates in its ongoing fight against inflation. When the Fed eventually pauses its campaign, it is likely to create a tailwind for stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. and bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates.. Our approach to narrow market conditions is to manage risksThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. through portfolio diversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not.. The trends driving performance today could switch direction unexpectedly, for this reason, we are positioning assets to account for a range of short- and intermediate-term outcomes. The market and economic themes we cover are important in the context of our clients’ long-term goals. Our advisors are informed and ready to assist with your financial plan to help you meet your personal priorities. Call us! The markets experienced a shaky moment in March when Silicon Valley Bank failed, triggering a chain reaction that required the Federal Reserve to step in and reinforce the suddenly beleaguered banking sector. But investors soon shrugged off fears of a wider crisis, and the Fed was confident enough in the stability of the financial markets to raise interest rates at its next policy meeting as part of its ongoing fight against inflation. So, where do we go from here? While we expect increased noise surrounding the debt-ceiling debate and conflicting opinions in the months ahead on whether the U.S. economy is in recession, the following themes are foremost on our radar when it comes to the investment portion of our clients’ long-term financial plans. Spring Themes The Fed will dominate the market narrative, with its every policy move and utterance under scrutiny. The central bank has been engaged in a concerted effort to reduce inflation, which spiked to as high as 9% in 2022, by cooling down the economy. The banking mini crisis created some additional uncertainty around what policymakers might do to accomplish their dual mandate of price stability and maximum employment. While the Fed went ahead with a rate hike in March, there is growing sentiment that it may soon be time for a pause or even a reversal of its interest-rate policy if we are to avoid the “hard landing” of a prolonged recession in the U.S. Right now, some indicators lend weight to the argument that it’s time to pause (the stress high rates put on the financial sector) even as others point to the need for more hikes (stubbornly high inflation, a strong job market). We’re not in the business of economic forecasting, but soon, this rate-hike cycle will end and the Fed will pause. These kinds of shifts have historically provided a tailwind for both stocks and bonds. Note: Chart shows the average three-year total return for stocks (S&P 500 Total Return index), bonds (Bloomberg U.S. Aggregate Bond Total Return index) and a balanced portfolio rebalanced monthly (60%/40% S&P 500/Bloomberg U.S. Aggregate Bond) from the end of the month when the Federal Reserve completed a period of hikes to the fed funds rate, alongside average three-year total returns over all rolling month-end periods from August 1984 through December 2021. For illustrative purposes only. It is not possible to invest directly in an index. Sources: Morningstar Direct, Adviser. Turning our view to the job market and rising prices, which are interrelated, we’re seeing signs that Fed policy is working to slow the pace of inflation (though at 5% in March it was still well above the target rate of 2%). We expect to see the job market soften later this year and the unemployment rate begin to rise—job creation slowed in March, as did wage growth. The recent weakness in the banking sector will only add to this pressure. A cooler job market would support a Fed pause. Two additional themes may appear at odds with each other—but both point to the value of diversification in a portfolio. We’ve seen a reversal of fortune in the outperformance trend between growth and value stocksA stock that is statistically cheap as a multiple of its earnings or book value, as compared to the overall stock market., as well as between U.S. and foreign stocks. Value beat growth by 10% in Q4 2022, but growth is ahead by 13% this year through Q1. And developed foreign stocks are outpacing U.S. stocks by 1% in Q1, building on a 10% advantage in Q4 2022 and reversing a multiyear trend of U.S. outperformance. It would be easy to point to these shifts as a reason to build concentration in those winning segments and allocate less to the losers. But that would require buying high and selling low while taking on additional investment riskThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline. by sacrificing diversification. Speaking of concentration, we’re again seeing a handful of stocks dominating the S&P 500 index. In fact, it is so extreme today that just seven companies’ stocks (Apple, Microsoft, Nvidia, Tesla, Meta, Amazon and Alphabet), which add up to 22% of the overall index, account for an outsized 83% of the S&P 500’s 7.5% year-to-date return through March. Two takeaways here: First, it’s anyone’s guess how long this group’s outperformance lasts, but when traders move away from these stocks, the swing from leading to lagging could be dramatic for portfolios heavily invested in them (the same goes for portfolios tilted toward the growth/value and U.S./foreign trends). The second takeaway is that outsized gains like these could lead an investor to measure the success of their investment strategy or financial plan against just what’s making news. This tendency is common, but it can become counterproductive if it leads to chasing short-term performance. We firmly believe in managing to our clients’ plans and not a market benchmark. This is why we monitor short-term market performance but advise clients not to make far-reaching decisions based upon what’s in the financial headlines—they are ultimately a distraction from your personal goals, which have far more to do with a lifestyle and legacy than an arbitrary yardstick like the S&P 500 or the Dow Jones Industrial Average. That said, we view economic and market analysis as just one of the tools we can employ on clients’ behalf. It helps us align their investment portfolio with their larger financial plans, keeping them positioned to advance toward their goals. Our investment philosophy is based on controlling costs, diversifying assets and putting the power of compounding over time to work for our clients. These principles have been foundational to our approach since day one, and we believe they are as relevant as ever now. Note: Chart shows index allocations to the seven top-performing names in the iShares Core S&P 500 ETF (a proxy for the S&P 500 index) along with their contributions to the index’s year-to-date return as of March 2023. Sources: Morningstar Direct, Adviser. The Adviser Advantage Like clients’ financial plans, which we continually revisit and revise, Adviser is evolving to better meet their changing needs. Led by Chief Executive Officer Mario Ramos, Head of Wealth Management Steve Reder and Chief Investment Officer Tim Clift, we are broadening our capabilities to meet clients where they are. This means adding new services, refining existing offerings and, most importantly, making sure we understand what matters most to our clients so that their plans are tailored to their personal priorities. Our advisors—who have decades of experience helping clients navigate a wide range of market environments and life events—have found that the steepest challenge people face when it comes to their money is achieving peace of mind, not selecting specific investments. How we feel about our finances and how this sways our decision making is the most influential factor in an investor’s success. That’s why we want to know what makes clients nervous, what makes them feel safe and what gives them joy. Our goal is to partner with people to find their path to financial freedom and determine what success looks like for them and their families. As much as possible, we want to relieve people of financial stress in their day-to-day lives so that they have the time to focus on what they enjoy. Our wealth advisors are uniquely equipped to guide you through each stage of life. Whether you are building your wealth, starting a family, figuring out what to do with stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. options, succession planning for your business, entering retirement or creating a legacy plan, our advisors, supported by our deep bench of investment, planning and tax professionals, will help you every step of the way. Please contact us at any time if you’d like to learn more about what our advisors can do for you and your financial goals. This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed. Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged. Companies mentioned herein are not necessarily held in client portfolios and our references to them should not be viewed as a recommendation to buy, sell or hold any of them. Past performance is not an indication of future returns. Tax, legal and insurance information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice, or as advice on whether to buy or surrender any insurance products. Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice, nor sell insurance products. 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