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An eventful Q1 signals big changes in the markets. Where do you stand?

I hope all of you had a wonderful Easter weekend with your loved ones. Our family just finished a spring break that included multiple visits to the ER (everybody’s fine!) and a canceled trip to New York City, so don’t expect to see smiling family photos this year. It’s been a whirlwind couple of weeks, but we’ve managed to spend quality time together in the midst of the chaos.

Sometimes the best-laid plans don’t work out as you expected. My mother always said, when things don’t go your way, consider the “why.” 

I believe that the Federal Reserve would do well to consider that message. We’ve just gone through a banking crisis caused in part by the Fed aggressively raising interest rates, which resulted in the closure of one of the largest banks in the U.S. and the sharpest decline in commercial lending on record. In the meantime, wage inflation and housing costs remain stubbornly high, while unemployment is historically low.

I hope that the Fed would stop to consider the “why” before determining if it needs to raise rates any higher. Raising rates often breaks something in the economy, and in this case, it was the banks. Reduced lending will have repercussions for everyone as the banks circle the wagons and naturally slow economic progress. 

I believe this will cause the economy to cool faster than the Federal Reserve and analysts anticipated. If that proves true, we may be in a situation later this year where the Fed will have to start cutting rates. We anticipate that the turbulence I wrote about recently will continue. The next few reports that we’ll see — markets, inflation, jobs, CPI, PPI — are all trailing indicators, and the banking crisis will start to show up in these indicators in the coming months. We’re going to eventually get home, but we might be rerouted through a different airport. 

The market anticipates the Fed to raise rates one more time in May to nip inflation in the bud, but I believe we’ll see a significant decrease in inflation in the second half of the year. We continue to hear about the overall improvement of the supply chain, and I’m going to be looking to see how that feeds into the grocery aisle and in chain restaurants. Within the year, we hope to see lower costs reflected in lower prices, while the cost of financing a car or mortgage should be lower than it is today. As long as it doesn’t turn into deflation, this should be met positively by the financial markets. 

I’m sure you’re wondering what all of this means for how we’re managing the bumpy ride. The good news is that we just wrapped up the first quarter, and the market has not let us down. Our portfolios did really well, outperforming many of the major indices as we leaned more on growth stocks and less on value stocks, which came back into vogue this quarter.

During this weakness in value stocks, we used the pullback in the energy markets to increase our exposure to the energy sector. Like many others, we believe that Americans will be paying a higher price at the pumps in the summer of 2023. 

We increased exposure in the healthcare sector due to what we feel are some amazing new products from some of our companies. 

We also increased exposure with some companies that benefit from the reopening of China as it is no longer nailing its citizens into their homes, instead finally allowing them to get out and travel again.

Looking ahead to first-quarter earnings, which begin in earnest over the next few days, I’m eager to see how the banking and financial sectors account for this recent crisis. I expect to hear announcements of layoffs in the financial sector as banks are forced to cut costs as they work to improve their balance sheets. We hear from corporations four times per year about how the last quarter of business went, and this discussion provides Wall Street guidance on what they believe the next several months will look like. 

I enjoy earnings season because it gives me the ability to not only hear from the companies we’re currently invested in but also to hear from the hundreds of other companies in the S&P 500. This gives us the clearest road map possible for making informed decisions about our portfolios and making sure we’re allocating wisely.

This might be a good time for us to talk about your current investment strategy. We can look at your current risk, budget, retirement plan — anything that might help you make your money work best for you. Contact us today to set up a time, and we’ll go through it all together.

Article by David Smyth, Senior Partner at Family Financial Partners — a financial services firm in Lexington, Kentucky.

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