After a calamitous year in 2022 – the S&P 500 was down -19.4%,* Nasdaq fell -33.1%,* and long-term treasuries were down as much as -39.14%** — the first quarter of 2023 saw a sharp snapback: the S&P 500 advanced 7.03%* while Nasdaq rallied 16.77%*; long-term treasuries gained +9.1%**.

The Fed has raised interest rates nine times since March of ’22, going from 0 to 4.75-5% in one if not the most aggressive rate-hiking campaigns in history, causing last year’s market swoon with dire forecasts of recession and an earnings debacle.

So far, an unemployment rate of 3.5%,*** rising wages, many more job openings than workers, and higher savings due to pandemic stimulus than pre-covid, has kept consumers spending and the economy stable, albeit at a slowing rate as evidenced by declining but still positive retails sales.

Our view is that inflation peaked last June at 9.1% and is slowly if unevenly easing, e.g., the CPI was up 5% in March.*** Given evidence of a weakening economy, e.g., slowing housing and loan growth, the Leading Economic Index (LEI) down 12 months in a row through March, and the uncertainty of the lagged impact of recent rate hikes and the mid-March banking fright on loan growth and re-financing to small businesses,consumers and smaller commercial real estate borrowers, the Fed is likely done the majority of its rate hikes.

Market bookies are still giving an 87%**** probability of a 25bps rate hike in early May, but a pause then or after is highly likely.That view – that declining inflation means fewer rate hikes ahead — is what sparked the stock market at the turn of the year to begin moving higher: investors were poorly positioned with an under-investment inequities, and much was already discounted.

Mega-cap tech stocks, of which we have been long-term investors, had seen valuation slashes of 30-50% and more. Core holdings in all our portfolios have rebounded strongly, e.g., Meta up 77+% YTD (-65% in ’22) and Nvidia up 85% (down 57% ’22).

Concerns about cuts to earnings and margins and a possible recession in early ’24 are echoed in a growing chorus of economists, strategists and institutional investors arguing against further rate hikes: that means continued volatility in the market, but we see a trading range as the most likely outcome for now.

A pause in rate hikes and a market looking through near-term uncertainties to a time when the Fed will cut rates seem to be providing underlying support. The rise in valuation for many market sectors, however, (overall S&P 500 P/E at 18ish) likely caps upside in the near term.

We were well positioned coming into this year to capture the strong start and will continue to opportunistically trim positions and add when prices allow. Short-term cash is yielding 4.5-5% with negligible risk (US treasuries) and provides added income to portfolios.

As always, we at BD8 Capital Partners continue to focus on your long-term financial future and planning needs, while managing your investments to help meet your financial goals.

Please never hesitate to contact us with any questions or concerns.
Best always,
Barbara Doran
BD8 Capital Partners LLC
Cell: 917-733-7644
Fax: 917-580-6882
**Edward McQuarrie, investment historian and professor emeritus at Santa Clara University
*** Bureau of Labor Statistics

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