The U.S. economy in the first half of 2023 defied all expectations: The recession that most economists have been warning about for the last 18 months never materialized. The labor market remains extremely strong. The unemployment rate in May 2023 stood at 3.4%, very close to a three-decade record low, according to the Bureau of Labor Statistics. Empirically one can clearly see all the “help wanted” signs on the storefront windows. The length of the lines at security checkpoints in almost every U.S. airport attest to the vitality of the summer traveling season. Recessions happen when people who need to work lose their much-needed income and do not have the luxury of flying to Europe.
Tech euphoria
The U.S. equity markets have been euphoric over the benefits that artificial intelligence will bring to society. The investors at the root of that euphoria have been elated by the positive impact to the bottom line of the U.S. technology companies leading the race to capitalize on this latest revolution, which is often compared to the Internet revolution that started in the mid-1990s. However, the frenzy over AI was matched in other corners of the stock market with the despair over the rapid collapse of several regional banks in March 2023. As an example, Silicon Valley Bank, a $200 billion in assets regional bank catering to technology start-ups in the San Francisco Bay Area, was taken over by the FDIC on March 23, 2023, wiping out over $20 billion of shareholders’ equity in the process.
The S&P 500 Index surged in the first half of 2023, up about 14%, but it is important to note that the strong performance is somewhat deceptive as a large proportion of the returns were driven exclusively by a few technology companies (Amazon, Apple, Microsoft, Meta, NVDA, Google, Tesla). The notable gains registered by these tech giants in 2023 stem in part from a reversal of the sharp losses they registered in 2022 but also from their prospects of boosting revenue using AI technology. The performance of these stocks has masked a relatively mediocre showing for the average company that’s part of the the S&P Index. They’re up just 2% to 3% on average, as measured by the ETF RSP tracking the S&P on an equal weight basis, according to Invesco ETF.
Calm returns to bonds
In the fixed-income market, calm has been restored after the significant losses suffered by every sector in the bond markets in 2022. The Schwab U.S. Bond aggregate is up 2% year to date and on pace to return 4% to 4.5% for the year. The Federal Reserve has paused its aggressive tightening of monetary policy for the first time in a year and a half. However, as inflation is still stubbornly high (4.9% in May 2023 as measured by the Consumer Price Index), the U.S. central bank will most likely raise rates again. Historically, tighter monetary policies have created negative events for the market. Put into layman’s terms, “The Fed breaks something.” This is the main reason that, while actively managing your portfolio, we remain defensive in our investment positioning.
Three investment pillars
Given this backdrop of a strong economy and the threat of rising rates, we at Elevage Partners have continued to manage your portfolios with three themes in mind:
- Favoring short-term, safe investments in the one- to three-year year part of the treasury market curve to provide income and safety.
- Diversifying in high-quality equity names with strong balance sheets (avoiding the disaster in regional banks, for example).
- Prudently increasing exposure to the market segment that will prosper in the nascent opportunities brought on by AI products (initiating positions in Salesforce, Google, and CIBR, an ETF focusing on cybersecurity).
Eyes on the long term
As we stated repeatedly during the difficult times experienced in 2022, we continue to keep our eyes on the long-term to support your specific financial planning goals, informed by your personal tolerance for risk. This has paid off as most of your portfolios have resumed wealth accumulation this year, while the volatility of your accounts has subsided during the first half of 2023. We stayed the course, which should not be confused with being inactive. Rather, this means that we remained prudent in making the required adjustments to reach your destination as circumstances warranted.
We did not run for the hills during the media frenzy around the negotiations to increase the debt ceiling and the threat of the U.S. not paying its bills. On the contrary, we are optimistic that several key pieces of legislation (the Inflation Reduction Act, Infrastructure and Jobs Act, Semiconductors and Science Act) in Washington will usher the start of what could be called America’s Infrastructure Decade. Throughout the remainder of the year, you should expect that we will make selected investments to capitalize on the opportunities created by these initiatives.
As always, we would love to answer questions or discuss market trends and specific investment ideas, so please do not hesitate to reach out to us.
Warm regards,
Thierry Hasse
Chief Investment Officer
The information contained herein represents the views of Elevage Partners at a specific point in time and is based on information believed to be reliable. No representation or warranty is made concerning the accuracy of any data compiled herein In addition, there can be no guarantee that any projection, forecast, or opinion in these materials will be realized. Any statement non-factual in nature constitutes only current opinion which is subject to change. These materials are provided for informational purposes only and do not constitute investment advice. Any reference to a security listed herein does not constitute a recommendation to buy, sell, or hold such security. Past performance is no guarantee of future results. The historical returns of any securities and/or sectors mentioned in this commentary are not necessarily indicative of their future performance. Information that is provided through hyperlinks within this market commentary are third-party content, which although believed to be accurate, have not been independently verified.