Suitable asset allocation involves an understanding of the current market environment.
- April was characterized by some of the largest companies in the S&P 500 posting above consensus earnings. Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOG), Meta (META) and Exxon (XOM) are part of the ten (10) largest companies in the S&P 500. All released better than expected earnings. These better earnings releases are on the back of companies guiding lower in Q4 2022 (lowering expectations) and now surprising to the upside in Q1 in addition to reaffirming positive forward guidance.
- The U.S. economy grew 1.1% annualized in the first quarter, the third consecutive downshift in quarterly growth, The U.S. economy is slowing markets, but markets don’t always line up with recessions.
- Consumers started the year on strong footing as spending on both goods and services added to headline growth in the first quarter. We know consumers were still spending in January, but since March they have pulled back, as consumers are getting more pessimistic about the future.
- Inflation is declining. The Personal Consumption Expenditures (PCE) report reveals the economy is still experiencing a dichotomy between goods inflation and services inflation, but at least both growth rates are declining.
- As growth and inflation are both slowing, the Fed can legitimately transition to a pause and then perhaps an outright cut in rates by the end of the year if the economy deteriorates.
- JPMorgan Chase Takes Over First Republic Bank. The First Republic Bank failure is the second-largest bank failure in U.S. history, with Washington Mutual’s 2008 failure being the largest in U.S. history. Bank sentiment headwinds and signs of an economic slowdown are near-term negatives, but we believe these developments are partially offset by the possibility that the Federal Reserve’s interest rate tightening could be near its end as inflation pressures ease.
Over the long term, your asset allocation – the mix of the different types of investments an investor holds in their portfolio- is the primary driver of long-term returns. As we consider the suitable mix of assets for your long term goals, a strong focus on low/negatively correlated assets classes (the true meaning of diversification) in conjunction with an understanding and appreciation for the current investment climate is critical.
Small cap stocks can be a valuable component of a diversified investment portfolio. While they may carry higher risk and volatility compared to larger, more established companies, they also offer the potential for higher returns and growth. A trend towards reshoring manufacturing back to the U.S. to promote supply chain resilience combined with low starting valuation make this an asset class that we’ve been focusing on recently.
However, it’s important to carefully consider individual investment goals, risk tolerance, and overall portfolio objectives before making any investment decisions. In the coming months we will be reviewing your individual asset allocation given these new market conditions to ensure your allocation is still in line with your personal longer term financial goals.
Past performance is no guarantee of future results. Please note that individual situations can vary. All investing involves risk including loss of principal. No strategy assures success or protects against loss. International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors.