Topic: Portfolio Management

We wanted to take this occasion to look back at the content we’ve produced so far this year and share the five most widely read pieces of 2023 in case you missed any of them — or if you want to revisit and share them with friends and family.

Every week, we thoughtfully craft these pieces with our clients in mind, broaching subjects we think are relevant and interesting. This is not syndicated content. We want you to find value in these letters — especially in times like these.

1. A New Bull Market Has Begun — Here’s What Investors Should Know

June 15, 2023 | The S&P 500 closed more than 20% higher than its October low. For now, the 2022 bear market is over.

The duration of a bull market has varied significantly. Historically, bull markets have averaged 39.4 months and have produced an average gain of 130.1%. If you exclude the Great Depression, the average bull market has lasted 51 months and produced an average gain of 147%. We are now eight months into the current bull market, starting at the October low. Read more >

2. The Fed Raised Rates Again — Here’s What That Means for Investors

Feb. 9, 2023 | Though it appears that the Fed may be close to ending its rate-hiking cycle, additional increases still are likely.

As long as demand (GDP) and employment remain as strong as they are, the Fed will remain hesitant to cut rates and may even continue to raise them past the 5% federal fund target level. Remember, the stock market is a leading indicator, and it should lead the economy as it eventually stabilizes. Read more >

3. What Will It Take for Bonds to Bounce Back from a Historic Meltdown?

Feb. 2, 2023 | Strong yields and the prospect of a less hawkish Federal Reserve are breathing new life into bonds in 2023.

The Fed is poised to continue raising rates. However, the increase is unlikely to be as dramatic as 2022. Strong yields and the prospect of a less hawkish Federal Reserve are breathing new life into bonds. Read more >

4. An Introduction to ChatGPT, With Some Assistance From ChatGPT

April 20, 2023 | The AI tool has the potential to be transformative, with capabilities that could change how businesses allocate resources.

ChatGPT is a powerful artificial-intelligence chatbot that allows you to ask it questions using everyday language, rather than using search terms. ChatGPT responds in a conversational manner. As opposed to Siri or Alexa, these neural networks are trained on huge quantities of information from the internet of deep learning. Read more > 

5. Here’s What Investors Need to Know About Banking Turmoil in the U.S.

March 13, 2023 | With the failure of Silicon Valley Bank and Signature Bank, the financial markets experienced a shock not seen since the Great Financial Crisis in 2008.

Could other banks have a similar fate to SVB? The short answer is yes. But remember: After both the Great Depression and the Great Financial Crisis, processes and procedures were put in place for this very reason. Read more >

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

The dog days of the summer are upon us. As the weather heats up across the U.S., market volatility is cooler than it was before COVID. Last year’s market volatility hastened a flight to cash for many, with record inflows for money market and short-term Treasury notes.

You have heard this from us many times, and we will continue the same mantra: Overweight cash allocations may come with high opportunity costs, i.e., missing out on the market. As the chart below shows, the difference in ending portfolio values between perfectly timed annual S&P 500 contributions and the worst-timed contributions is only $300,000. But the difference between the worst-timed contributions on an annual basis into the S&P 500 and holding cash in short-term Treasury notes is almost $600,000. 

Hypothetical Portfolio Value with $12,000 Annual Contributions (2000-2023 YTD)

We are on much better footing than we were at this time last year (and even at the start of this year), from both a growth perspective and an inflation perspective. The S&P 500 is about 8% from its all-time highs. 

We don’t know when the next shoe will drop, or what will cause it, but there are always opportunities in the market. Stocks remain long-term growth engines of investment portfolios. The chart below looks back over the significant news headlines of the last 23 years; if you were invested in 60% stocks and 40% bonds over that time frame, the cumulative return could have been over 300%. 

Only one time period (2022) shows negative growth, and that was because there has not yet been enough time to recapture that loss. Staying invested through all the bad news — and not timing the market — remains the best strategy.

Investment Portfolios Are Built to Last

U.S. 60% equity, 40% fixed income portfolio returns, %

From a portfolio-management perspective, we continue to look ahead. The markets are forward looking, often telling us what may happen ahead of time. We are watching for the most anticipated recession in history. At the same time, the underpinnings of the new bull market seem to be alive and well.

Housing is making a turnaround, and that is positive for the economy. Inflation continues to show signs of weakening. With an eye on the future, we are making the following portfolio changes as we start the third quarter:

• Over the last year and a half, we have maintained a shorter-duration fixed-income portfolio, as the Fed has been actively raising rates. The portfolio benefited as the very short end of the yield curve (one year and less) saw higher interest rates. The longer-dated maturities and end of the yield curve have continued to yield less than the short-end (inverted yield curve). The Fed paused in June from raising interest rates, after 10 consecutive rate hikes.

There is a possibility of another one or two interest rate hikes, but we believe most of the change is already accounted for in the bond market. Since we are near the end of the Fed raising rates, we are extending the duration of the portfolio and removing our short-duration position. With this strategy, we are able to increase the overall yield of the fixed income portfolio to be well positioned for when the Fed decides to reduce interest rates — and to capture capital appreciation as well.

• For the month of June, we started to see more stocks participating in the rally that has been dominated by mega-cap technology names since the start of the year. More than 10% of stocks in the S&P 500 hit a new 52-week high last week, the most since March 2022. As seen in the chart below, other indexes for the month of June are outperforming the S&P 500. With the broadening of the market rally, we are adding an equal weight S&P 500 position to go along with market-weight S&P 500 exposure to provide a more balanced large-cap growth and value mix while reducing exposure to heavily weighted dividend stocks. 

In June, the Rally Is Broadening Out Beyond Tech

Month-to-date price return, %

As we enter the second half of the year, the market will be closely watching to see if a recession unfolds, caused by additional interest rate hikes, stubborn inflation and any remaining effects of the banking crisis. The expectation is that the recession would be mild, lasting one or two quarters and bringing a decline in corporate profits.

Although money market yields continue to provide a nice return now, they will not last forever. We do not know how much, if any, of a potential recession is priced into the markets today, but the portfolio changes we are making are looking past 2023 and are focused on an improving economy in the years ahead.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Bloomberg, Goldman Sachs, JP Morgan

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

The S&P 500 officially entered bull market territory last week, closing more than 20% higher than its low on Oct. 12, 2022. For now, the 2022 bear market is over.

The stock market has inched higher as the economy continued to surprise while inflation has cooled. Inflation, measured by Consumer Price Index (CPI), has slowed for 11 consecutive months. In May, prices rose at the slowest annual pace since March 2021. 

New lows have happened just two times after stocks gained 20% off the bottom: the global financial crisis of 2007-2009 and the tech bubble of 2000-2002. The average return 12 months after the end of a bear market was 17.7%, as seen in the chart below.

A New Bull Market Should Have Bulls Smiling Very Soon

New bull markets start (20% off bear lows) and what happened next for the S&P 500

S&P 500 | Duration & Performance of Bull Markets (1929-YTD)

We still would like to see more breadth in the market, meaning more sectors other than technology participating in the rally. Big Tech gains have been driven in part by investor enthusiasm for the rise of artificial intelligence. ChatGPT has become the fastest-growing consumer app in history. Last week, we started to see other sectors gain momentum, as small-cap and international stocks also began to rally. The seven biggest stocks (Apple, Amazon, Google, Meta, Microsoft, Nvidia and Tesla) gained 77% this year through the end of May, while the average stock in the index is down 1.2% over the same time. 

In or Out?

Three sectors have generated most of the S&P 500’s returns this year.

The declining dollar has helped international companies, as other currencies have gained compared to the dollar. Since October, the dollar has declined 6% as measured by the J.P. Morgan USD Real Effective Exchange Rate Index. At the same time, investors have continued to shift assets from stocks and bonds into money market funds. Money markets reached a record level at over $5.39 trillion in late May. This flight to cash has been understandable following last year’s decline of both stocks and bonds as well as higher interest rates.

Many investors moved monies from banks to money markets among higher yields on cash alternatives. When cash starts to unwind and move back into stocks and bonds, as it did after the global recession and pandemic, markets may be able to move even higher. 

Investors’ Flight to Cash Has Been Followed by Strong Returns

This doesn’t mean a recession is out of the equation. The Fed has raised rates from 0% to 5% over the last 15 months. These rate hikes are being felt throughout the economy, and we will continue to feel them. It typically takes 12 to 18 months for rate hikes to work their way through the system. 

A possible recession doesn’t mean that the market must collapse. Remember, markets are forward-looking, and investors are still positioned for the worst. The biggest risk to the market remains the Fed. Even if the Fed pauses rate hikes in June, it still could resume raising rates in July, possibly by as much as another 50 basis points. The hope is that such a move would ultimately be the last rate hike, but we will continue to follow this closely, as persistent inflation could upend the Fed strategy and the market rally.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Barron’s, Carson, Capital Group, U.S. News

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

The second half of 2023 is fast approaching, and it may hold the potential for fewer surprises now that we have a debt-ceiling deal in place until early 2025. At the same time, global central banks are moving toward a pause in interest-rate hikes, and signs of potential U.S.-China tensions are cooling. That doesn’t mean that the markets don’t have anything to worry about — the ongoing war in Ukraine, stronger inflation than the Fed would like, an expected decline in company earnings, a likely recession in office real estate and potentially residential real estate, and worries that tech stocks, specifically those focused on AI, are in a bubble.

We feel confident that over time, stocks will make new highs yet again, just as they have for the last 100-plus years. The chart below is an interesting reminder that over the last 122 years, the U.S. economy tends to win in the end, despite tough market conditions. The chart measures the Dow over time and considers recessions, market corrections, wars and other news events. The chart’s strong upwards line to the right shows that over the long term, stocks have gone up, despite short-term setbacks and road bumps.

Dow Jones Industrial Average: 122 Years of (Mostly) Bad News

We are now more than 100 trading days into the year. The S&P 500 was up 8.1% through the first 100 days. A good start to the year historically has suggested continued movement higher. When stocks have been up more than 7% during the first 100 days, the rest of the year has been up 89% of the time — and has added another 9.4% on average. 

There’s no doubt that a big part of the performance during the first half of the year is attributable to the “Magnificent Seven,” as Jim Cramer has coined them: Apple, Amazon, Google, Meta, Microsoft, Nvidia and Tesla. Through the end of May, the top 10 largest stocks in the S&P 500 had an average return of 9%, while the other 490 stocks in the index returned -4%. (Remember that past performance is no guarantee of future performance.)

Stocks Up Big as of Day 100 Could Mean More Green

S&P 500 YTD >7% on Day 100 and what happened the rest of the year

Historically, June can be a weak month for stocks; earnings season is over, and the summer doldrums have begun. The S&P has gained only .03% on average, but as the chart below shows, June gains have been 1.2% on average when stocks are up more than 8% this time of year.

June Isn’t Always Weak for Stocks

S&P 500 performance in June, from 1950-present

As we head into the second half of the year, we will be watching the impact of higher interest rates on the consumer and real estate, inflation and how the Fed handles interest rates, and the reopening of China’s economy. The economy has not fully felt the impact of last year’s interest rate hikes and the possibility remains for an additional rate hike or two this summer. 

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Brouwer & Janachowski, Carson, Fidelity, Schwab

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

With a week left until the June 1 debt-ceiling deadline, the president and congressional leaders have been negotiating to raise the ceiling and enact some hopeful budget reforms. As we all know, Congress often waits until right before a deadline to take action, but that doesn’t mean there won’t be angst and potential volatility in the markets as we get closer to the deadline.

A default or funding delay in the U.S. Treasury market would have global impacts. As the map below indicates, few nations have a debt ceiling similar to the United States. Our Treasury market is the deepest and most liquid of any nation in the world and a central component of the global financial system. Over the past 22 years, the U.S. has needed to increase the debt ceiling 22 times. Denmark, the only other developed country with a debt ceiling, has increased only once, and it did so out of precaution, not necessity.

We knew coming into 2023 that the two parties would have a standoff over the debt ceiling. We have a divided government and deteriorating fiscal environment. Since January, when the debt ceiling was first breached, the U.S. Treasury has been using extraordinary measures to avoid breaching the debt ceiling.

Spending has increased this year due to higher interest costs and larger payments tied to inflation; those of you who are on Social Security can attest to the nice increase in your monthly payment. At the same time, tax revenues have fallen 6% over the last year, causing the debt ceiling date to be moved up from late July or early August.

What does each party want from the negotiations?

House Republicans are calling for a cap on discretionary (nonessential) spending, rescinding unspent COVID monies and energy-permitting reform. In exchange for those items, they are willing to raise the debt ceiling. Democrats are calling for “clean” legislation, an increase in the debt ceiling without any policy provisions or conditions attached. They do not want spending cuts, especially to Medicare or Social Security, and neither side politically can afford to cut those two government provisions.

Republicans have passed a bill out of the House that would raise the debt ceiling but would also mandate $4.8 trillion in spending cuts. As of now, this bill does not have the votes to pass the Senate. The most likely outcome is a cap on discretionary spending and pulling back in unspent COVID dollars. The biggest discretionary spending item is defense spending. The White House has proposed keeping this flat from fiscal 2023 to 2024 and then a 1% increase in 2025. The chart below shows the impact of proposed curbs on discretionary spending in dollar terms.

Discretionary Spending

FY, Billions of dollars

As we get closer to the deadline, most economists and political talking heads are anticipating this turning into a two-step process. The first step would provide a short-term debt ceiling increase. The second step would fill in details and would be paired with another increase in the debt ceiling to get past the 2024 presidential election. While it feels like we are in unchartered territory and Congress has never been this acrimonious, we have been here before. As a matter of fact, Congress has been able to come to a resolution 78 times in the past 63 years.

The actual threat of a default of the U.S. debt is extremely low. It is important to know that the deadline is not the same as the default date. The U.S. Treasury is expected to have a small cushion of funds on June 1 that should provide several additional days of breathing room.

On June 15, the Treasury department has a large tax collection from quarterly payments. This may be more akin to a government shutdown, where the Treasury would have to prioritize other government spending but would have enough funds for Medicare, Social Security, defense, etc. We are entering a period of fiscal restraint and austerity compared to the last few years, as we have become accustomed to the environment of fiscal stimulus and cutting taxes.

It is more important than ever to focus on what we can control at times like these. We shared this illustration last week, but it is worth repeating. What drives market returns is the right side of the seesaw: time in the market, controlling your behavior, savings rate and asset allocation.

What Drives Investment Returns

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Baird, Fidelity, Schwab

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

It seems like the stock market can’t get away from the never-ending drama that emanates from our nation’s capital. Congress has always raised the debt ceiling when needed, but concerns are building as the sides remain far apart and political divisiveness is as bad as ever.

The standoff has heightened uncertainty about the economy, as default would risk sending bond yields higher — and stocks and the U.S. dollar lower. Volatility is likely to increase in the financial markets. This is the scenario that played out in the 2011 debt-ceiling fight, and it is likely that we will see it happen if history repeats itself.

If no deal is reached, the Treasury has a couple of options:

1. Technical default. This is defined as an extended period of non-payment of interest and principal on the debt. In the U.S., assuming an agreement was eventually reached, investors would receive interest and principal payments, likely with accrued interest.  

2. Creative possibilities. The Treasury could issue premium bonds that would generate a price above par, giving the Treasury additional cash. Another option could be that the Treasury could invoke Section 4 of the 14th Amendment, which some argue could give the president authority to order the nation’s debts be paid, regardless of the debt ceiling.

The other big debate revolves around whether the Fed will continue to raise rates to combat inflation. One of the benefits of higher rates from the Fed has been the return of attractive cash and short-term fixed-income returns. The chart below shows the massive inflows into money market funds since the pandemic.

There is now more than $5.2 trillion invested in the money market. With money market rates close to 5%, it is understandable that investors have moved monies from their regional or national bank to take advantage of the higher savings rates. Yields for very short-term Treasuries are elevated compared to those even a few months farther out, as investors shy away from the risk that interest on Treasury bills could be deferred.

ICI Money Market Fund Assets (USD Trillions)

A big question facing investors is just how long short-term bond yields may remain at historically high levels. If inflation remains sticky, we may be in for higher rates than the market has priced in. This would give investors the ability to earn more on cash and short-term CDs and Treasuries for a longer time — which may cause some investors to time their reentry into the market since they are earning near 5% on cash and cash equivalents.

You always want to have emergency cash sitting in something, and right now that’s giving you a nice return. When the Fed decides to cut interest rates, whether later this year or next year, money market, short-term Treasury and CD rates will fall as well. When rates fall, bond prices will rise, which is what we saw often before the Fed raised rates in March 2022. If this were to happen, as many believe it will, bond returns will be additive to total return.

The picture below is important to remember during times like these. What drives investment returns is the right side of the seesaw: time in the market, investment behavior (not making rash decisions), saving more than spending and diversification in the portfolio. The items on the left side of the seesaw — politics, media, news, headlines, opinions from talking heads — are just noise. 

Noise does not drive long-term investment returns. To participate in the upside of the bull market, you must survive and stay invested through a potential recession or debt-ceiling crisis. If there is not an agreement and we see volatility pick up — or a market sell-off — think back to the picture below and remember the four things that matter for long-term investment performance.

What Drives Investment Returns

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Baird, Bloomberg

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

Last week, the Federal Reserve bank raised interest rates another 25 basis points (0.25 percentage point), taking the Fed Funds rate to 5%. This was the 10th time the Fed has raised rates since March 2022. However, this time the Fed hinted that the tightening cycle is nearing or at an end. The Fed has made no indication that it will reduce rates anytime soon, and some Fed governors are still talking about possible rate hikes. Still, the stock and bond markets are signaling that they will probably begin to reduce interest rates later this year or early next year.

Federal Funds Target Rate Crests 5%

The range hasn’t been this high since August 2007.

In the face of higher interest rates, the stock market has continued to hang tough despite continued regional bank worries with First Republic Bank failing last week and increasing concern about the commercial real estate market. Over the last month, the S&P 500 has remained steady and traded in a narrow range. What might surprise you is that going back over the past 52 weeks, the S&P 500 was virtually flat, despite the negative headlines of record high inflation, a bond market crash, aggressive Fed hikes, the war in Ukraine, lockdowns in China and two of the three largest bank failures ever.

That is not to say that there hasn’t been volatility over the past year, but as we always preach, staying invested pays off. If you chose to get out back in October, when the market was hitting its bottom, you would have missed the market’s move to get back to where you were last May. The chart below is another strong reminder why we advocate for staying invested, especially when times are the toughest.

The April employment data suggests that the economy remains strong and resilient. The economy created 253,000 jobs in April, well above economists’ expectations. For the first four months of 2023, the economy created more than 1.1 million jobs. The unemployment rate has fallen to 3.4%, the lowest level since 1969! 

The biggest reason that the employment picture matters is that consumption makes up about 70% of the economy. Consumption is driven by income, and income is made up of strong employment, wage growth and hours worked. Even better news is that income growth is running above inflation. That means people have more money in their pockets, which is a positive for the economy.

Unemployment Rate at Lowest Level Since 1969

There is no sign of an economic slowdown yet, with one big caveat: the debt ceiling. As we wrote recently, all eyes are on the debt-ceiling negotiations, and the clock is ticking. Treasury Secretary Janet Yellen informed Congress last week that cash balances are estimated to be depleted by early June. The Senate, House and President Biden have seven calendar days of overlap for discussion before then.

Days With House and Senate in Session and President Biden Available

We remain hopeful that a resolution will be reached, though political games raise the likelihood of a time-sensitive outcome, possibly with the need to extend the deadline. Should there be a need to extend the deadline, there may be additional volatility. We will continue to monitor the negotiations and the economy closely and keep you informed.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Bloomberg, Carson, CNBC, JP Morgan

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.

Are we in a recession — or will we be in a recession soon? Will it be a hard or soft landing? Will the debt ceiling push us into a recession? How bad will it be on the stock market? 

These questions weigh on the minds of investors, business owners and decision makers — and the noise seems to grow louder each day. The Federal Reserve has been raising rates aggressively to combat inflation with the hopes of slowing the economy and wage growth. Essentially, the Fed is hoping for an economic slowdown and more layoffs. 

Doesn’t that sound like a recession?

Economic data is backward-looking by nature, while the stock market is anticipating where companies are headed and what their future valuation should be. Historically, the stock market has anticipated (and therefore priced in) improving economic conditions before they arrive. This makes market timing difficult and reinforces the importance of weathering the downturn. 

We fully recognize that downturns are not pleasant, but the markets historically have come out the other side much stronger. In the past, the stock market has tended to anticipate recoveries, rebounding ahead of any turn in the economy.

Returns Following the 5 Largest Market Declines Since 1929

Companies’ underlying fundamentals – revenue, profitability, cash flow, assets and liabilities — are the key determinants of stock returns across time. In other words, earnings are the key contributor to total return. For companies that reinvest earnings into revenue growth, better margins help investors weather the storm of a potential recession and come out stronger. Even as uncertainty clouds the big picture, companies that can maintain earnings growth throughout market cycles will remain prized, and their stock prices rewarded.

Fundamentals Dictate Long-Term Returns

S&P 500 Index sources of total return, 1988-2022

So, if we have a recession, what happens next? The U.S. still has a solid labor market. Household balance sheets remain strong. Inflation is moderating, and the Fed is near the end of the rate-hike cycle. This means strong wages and consumer confidence could boost consumer spending, providing additional help to a range of industries. 

Economists already predict that the Federal Reserve will have to begin lowering the Fed Funds rate later this year or next to stimulate the economy. A housing recovery could ensue, as mortgage rates could then begin to drop. Lower mortgage rates could provide a tailwind to construction spending and spending for other durable goods, like household appliances.

This may be the most widely anticipated recession in decades. Many investors remain focused on the timing and severity of the next recession. What if the recession is already priced into the market? Investors may be better served to prepare for what happens after a potential recession — and how we can benefit from the recovery instead of listening to the drumbeat of headlines about when a recession could happen.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market. 

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Capital Group, Blackrock, S&P

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Fidelity Investments and Fidelity Institutional® (together “Fidelity”) is an independent company, unaffiliated with Kestra Financial or CD Wealth Management. Fidelity is a service provider to both. There is no form of legal partnership, agency affiliation, or similar relationship between your financial advisor and Fidelity, nor is such a relationship created or implied by the information herein. Fidelity has not been involved with the preparation of the content supplied by CD Wealth Management and does not guarantee, or assume any responsibility for, its content. Fidelity Investments is a registered service mark of FMR LLC. Fidelity Institutional provides clearing, custody, or other brokerage services through National Financial Services LLC or Fidelity Brokerage Services LLC, Members NYSE, SIPC.