Spring 2023 Newsletter

Often times, it seems like parts of my life fly by while in other aspects, it creeps.

My “little girl” preparing for college is definitely the former while this market & economy are definitely the latter. The S&P 500 has literally been trading sideways in a tight range for almost a year. Little “inside baseball” for all of you: It’s way easier to manage our client’s portfolios and financial plans when the economic sun is shining or it’s clearly storming. So…Pick a direction already!!!

Sentiment often changes fast in the stock market, yet the real economy moves much slower. In the first quarter of 2023 there was a notable divergence between stock market performance and the prevailing economic reality. In our opinion, much of the current dynamic comes down to “FOMO” (fear of missing out). The past two decades plus of quick policy intervention on any sign of a weakening stock market or deteriorating economy has made all types of market participants highly fearful of missing the start of the next bull market. Simply put…nobody wants to miss the rally once the Federal Reserve stops hiking interest rates and stimulates the economy. We feel this prevailing logic is highly misplaced as policy is unlikely to turn stimulative in the absence of a significant economic downturn. With an economy that is clearly weakening, we believe that most market participants eager to chase stocks higher on every bounce are missing the forest for the trees.

Below are a few points to characterize 2023 thus far:

• The combination of AAPL, NVDA, MSFT, META, TSLA, AMZN, GOOGL, CRM and AMD have contributed to ~160% of the SPX gains on the year. Said another way…the S&P 500 would be negative without these stocks. Many cheering this on with stories of a “new bull market” have likely been holding the whole way down or don’t actually manage portfolios. (Google: Man in the Arena)

• Treasuries returned 3% in the first quarter — the biggest since the first three months of 2020 when the onset of the Covid pandemic sparked a flight into haven assets. This coincided as the first major US bank failures since 2008 sparked a reassessment of the likelihood of additional Fed rate increases, despite still-elevated inflation readings. Yields for Treasuries across most maturities reached their lowest levels of the year in March while measures of bond market volatility spiked to their highest levels in 15 years. The 1st quarter also saw risk signs start to emerge across key corporate credit markets.

• The price of Oil moved lower in Q1 as concerns of a global economic slowdown negatively impacted expectations for demand. As a result, OPEC+ announced a surprise oil production cut, abandoning previous assurances that it would hold supply steady. This significant reduction poses a new risk for the global economy where supply was already tightening. This development will likely make it more difficult for central bank policy to turn supportive as fighting inflation remains the primary objective for the Federal Reserve and politicians.

• In this cycle, college graduates are seeing unemployment rates rise more rapidly than those with less than a college degree. The unemployment rate for college grads bottomed in Sep 2022 and has risen 0.2% while those with less than a college degree saw unemployment rates bottom in January.Compared to the labor force prior to the financial crisis, college graduates now make up nearly 40%of the labor force versus only 28% pre-GFC.

• The ISM Manufacturing PMI decreased to 46.3 in March of 2023, the lowest since May of 2020, and compared to 47.7 in February implying that rising interest rates and growing recession fears are starting to weigh on businesses. The reading pointed to a 5th straight month of contraction in factory activity, as companies continue to slow outputs to better match demand and prepare for growth in the late summer/early fall period.

• While there have been a few notable exceptions, the ISM PMI data has generally been a reliable indicator of impending recessions. The current odds of a recession are hovering around 80%, which strongly suggests that we are either already experiencing or fast approaching a significant economic slowdown. We are currently facing that “possible” recession with elevated inflation, which likely delays aid from the Fed, and a violently divided Congress, which limits quick fiscal stimulus.

As a result of all of this…we are generally positioned in the following way:

•We remain light on stock exposure relative to our client’s appropriate risk appetites as we absolutely will never be stricken with the aforementioned “FOMO” in the absence of supportive quantitative data.

•We have moved to eliminate our positions in energy relative securities as our inputs suggest this area of the market could become highly vulnerable near term as the economy weakens.

We are taking advantage of higher interest rates in relatively safe areas of the market. Our analysis indicates this as a major opportunity that many are missing by simply following the stock market.Comparatively safe income to the portfolio is a key focus moving into Q2.

It’s always easier to interpret the past vs predicting the future. Comparing today to history is, frankly, very scary, so we continue to rely on our rigorous, data driven process for making decisions for our clients. While this has necessitated focusing on capturing yield and preserving capital for an extended period, we remain confident in our process that has weathered many market cycles. We will see when things get appetizing again and warrant taking risk with capital. Analyzing the data suggests the time to do this is not now. However, when it comes, and it will, we’ll be ready to fire with ample ammo! For the time being, hug someone close to ya, ask good questions, & stay patient!

Ryan A. Mumy, CFP®, AIF®
Chief Investment Officer

Andrew Radar, CFP®
Director of Financial Planning

Disclosures: The information provided in this paper is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as investment, legal or tax advice. Capital Investment Advisory Services, LLC makes no warranties with regard to the information or results obtained by third parties and its use and disclaim any liability arising out of or reliance on the information. This information is subject to change and, although based on information that Capital Investment Advisory Services, LLC considers reliable, it is not guaranteed as to accuracy or completeness. Source information is obtained from independent financial data suppliers. For investment related terms definitions, please visit: www.investopedia.com Past performance is no guarantee of future results. Advisory services through Capital Investment Advisory Services, LLC. Additional information about CIAS and its From ADV Part 2A are available on the SEC’s website at www.adviserinfo.sec.gov