Spring 2023

“Where do we go, where do we go now?” -Axel Rose, Sweet Child o’ mine.

2022 was a long and trying year for those of us “in the market”. Rapidly rising interest rates dealt the one-two punch of declining bond values and lower P/E multiples on stocks.

To say growth stocks were challenged is a gross understatement. Fan favorites like Tesla, Peloton, and even Amazon and Facebook cliff dove from all-time highs to about half that level, if they were lucky.

The only ones to avoid the carnage were sideline spectators – read cash.

The Fed is still driving the bus and, optimistically, will be done raising rates before the summer; though we believe Powell et al are resolute in their mantra of higher for longer. Simply translated, once rates are around 5% on the short end, they are reluctant to lower any time soon for fear that inflation might come roaring back. To add to their fear, China recently reversed its strict Covid lockdown policy which should add fuel to the inflation fire as demand for raw goods and commodities heats up with the Chinese economy thawing from forced metaphorical freezes.

The recent step back to a 0.25% rate hike at the beginning of February signals we are closer to “terminal” rates that we were last year. We expect a few more .25% hikes but that’s about it.

As a counterbalance, it looks like Europe has avoided disaster in the energy space and was able to secure and hoard enough natural gas not only to survive the winter, but with a little help from mother nature, to depress natural gas prices significantly for the time being.

The elephant in the letter is whether or not we spell recession with a big R, a little r, or an Rx (Fed prescribed recession). The consumer that was pushing the economy ahead into the holiday season isn’t quite tapped out yet, but we are starting to see signs of deceleration. Auto and home sales have ground to a halt, as mentioned in our prior missive, and that doesn’t seem to be changing anytime soon.

With unemployment low and wages still rising, it is hard to categorize this as a typical anything – so our conclusion is that we are in, or will soon have, a recession; but it will hopefully not be a duplicate of the great financial crisis in 2008.

We are a much better capitalized society this time around from the banks down to the consumer. Second, inflation seems to be waning and we expect that to continue. Additionally, businesses are doing well. From small business entrepreneurs to the corporate earnings Peter and I keep up with, the world we pay attention to is cash flowing. Decelerating maybe, but positive cash flows make up for a lot.

So our tact this year is multifaceted – continue to find good relative values in a volatile equity market, continue to allocate to higher yielding fixed income that keeps our assets safe and gives us predictable income, and hunt for opportunity in the private markets should there be dislocations or adjustments to be taking advantage of.

As always, we thank you for your trust and confidence, a responsibility we do not take for granted.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investments mentioned may not be suitable for all investors. Past performance may not be indicative of future results. Raymond James financial advisors do not render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Investing always involves risk and you may incur a profit or loss. No investment strategy can guarantee success. Any opinions are those of Peter Bermont & Michael Gold, not necessarily those of Raymond James.