April 2023

Investment Conditions & Outlook

Executive Summary

As we end the first quarter of 2023, we anticipate the economic and market landscapes to continue to change. The markets are closely watching the Fed and policy
decisions, which will likely drive market movements throughout the year. We are pleased to see that the markets have rebounded from the lows of last October.
However, it is important to note that the performance of concentrated indices does not always reflect the overall health of the markets. Year to date, 95% of the S&P
500’s gain has come from the top six firms – Apple, Microsoft, Amazon, NVIDIA, Alphabet, and Tesla. These six companies account for 20% of the index and have an
average price-to-earnings ratio of 66.3, compared to the S&P 500’s 20.1 times earnings.

International markets, chiefly Europe and China, have experienced better-than-anticipated growth. We have seen the housing market soften significantly and
credit markets become tight (see The Chart of the Quarter).

However, a sudden and unexpected bank crisis in early March caused a volatile ride in the markets, particularly in the financial sector. While the industry has
since stabilized, we remain watchful of the banking sector and its impact on interest rates. In reaction to the current banking stress, the Federal Reserve
changed its posture, noting that the American banking system is stable and strong. It did, however, acknowledge that recent events may result in tighter
lending conditions for people and companies, which might have a negative impact on economic growth, employment, and inflation. The exact consequences
are uncertain, but the Committee is carefully monitoring the risk of inflation.

We will continue to focus on two key figures: inflation and interest rates. Although the consumer price index has fallen to 6%, it remains significantly above the
Fed’s target of 2%. The economy has cooled due to unprecedented rate hikes in 2022, and the question is, where do we go from here? There is a wide range of
outcomes available, but the consensus right now is one additional rate hike followed by a likely pause. We believe that if the U.S. does slip into a recession, it will
likely be mild.

The Fed has reached a critical point in its battle against inflation, and the next few months will be crucial in achieving a soft landing without tipping the U.S. into
a recession. We have seen the housing market soften significantly and credit markets become tight (see The Chart of the Month), partly due to the recent
banking sector scare. However, the labor market continues to be resilient, providing hope to the Fed that a soft landing may still be possible.
We are seeing positive signs in the market, but it’s important not to get carried away and assume everything is back to normal. It’s crucial to stick with
quality investments and avoid taking unnecessary risks. Our focus remains on companies with stable earnings, reasonable valuations, strong free cash flow,
and low leverage. This is not a time to take on concentrated or excessive portfolio risk. Our team at Janiczek Wealth Management is committed to working
with you to manage your investments and meet your goals in these uncertain times.

The Janiczek Team

Economic Conditions and Key Takeaways

• The Fed should likely stop rapid rate hikes (but this does not mean they are finished) when the financial fallout becomes clearer, with inflation likely staying above the 2% policy target.
• Credit conditions have tightened in developed markets, with the latest episode of banking stress making things tighter.
• The higher wages private sector firms are offering to fill vacancies is resulting in sticky core services inflation.
• The political showdown over the U.S. debt ceiling is still playing out, but a default on U.S. government debt is unlikely.

The dollar has risen modestly this year on Fed hawkishness. Still, we would expect it to weaken as inflation declines and the Fed pivots to a less hawkish stance benefiting international equities.

Economic Conditions

 

Source:  Bloomberg

Equity Performance and Key Takeaways

• Continued rebound across global equity markets (led by non-U.S. developed markets) as consumer spending, headline job growth, and wage inflation all surprised to the upside in the U.S. and Europe surprised with their strength to avoid a recession that seemed inevitable last year.
• China is an important exporter to the rest of the global markets, and its reopening after COVID lockdowns should help to boost its GDP for the year.
• An extended period of higher rates should favor value investments as investors are less comfortable owning companies with high expectations of future earnings but little current profits.
• A focus on the financial strength of companies is important when lower-quality companies can no longer survive on cheap debt financing.

From a historic price perspective, U.S. equities continue to look expensive relative to non-U.S. equities even after a rebound this quarter.
Source:  Bloomberg

Fixed Income Performance & Key Takeaways

• Bond markets pricing in rate cuts for 2023 reflecting the old recession playbook where banks cut rates on signs of economic and financial damage.
• Tighter credit and financial conditions could be a headwind for high-yield bonds.
• We continue to like short-duration bonds for their income and lower duration risk.
• Though unfavorable, a recession could be good for bond prices if investors turn to bonds for safety.

The yield curve remains inverted due to bond investors thinking the Fed has tightened so much that interest rates will be lower in the future.
Source:  Bloomberg

Chart of The Quarter

Source:  Bloomberg

The above chart compares the Goldman Sachs U.S. Financial Conditions index (teal) to the Fed Funds rate’s upper bound (orange). The higher the blue line, the better the financial conditions (looser conditions), and vice versa. According to the Goldman Sachs U.S. Financial Conditions index, conditions continue to tighten as economic activity slows. Financial conditions represent the availability of financing in an economy and are directly linked with future growth. Looking at this chart, one can discern a protracted slowing in growth that is running below the upper bound of the Fed Funds rate. Has growth slowed enough to warrant a halt in rate hikes? We’ll have to wait and see where inflation goes before the next Fed meeting. Yet it appears that we are getting closer.

Wealth & Tax Management Key Takeaways

“Is my cash safe?”

It’s a question many of our clients have been asking with the recent turmoil in the banking sector. We understand and are sensitive to these concerns, especially when you consider cash to be your safest, most liquid asset to cover daily expenses and emergency needs.

A well-designed financial plan is built on sound cash management, which helps you to satisfy short-term obligations, prepare for future liabilities, and maintain financial stability.

In addition to answering the question above, consider the following:

• How much is enough cash to have on hand?
  Our recommended standards for clients with stable income is 3-6 months of monthly expenses in cash reserves; those with volatile income or retirees should keep 6-12 months. Include expected big expenses.
• Is my cash earning a competitive interest rate?
  Bank account yields sometimes lag behind those of money market funds when interest rates rise. A standard bank checking account in today’s environment is typically earning between 0.20% – 0.50%. By comparison, Schwab’s money market fund rates are currently around 4.5%.

Is my cash safe (in a bank account and in a brokerage account)?
The Federal Deposit Insurance Corporation (FDIC) insures bank accounts, or deposits on a bank’s balance sheet, up to $250,000 per depositor, per bank account. A money market fund held with a brokerage company such as Schwab is guaranteed by the Securities Investor Protection Corporation (SIPC) up to $500,000. In Schwab’s case, they have chosen to further protect client assets with a Lloyd’s of London insurance policy that covers an additional $150 million in securities losses per customer. While it’s necessary to maintain an appropriate bank balance for daily/monthly cash flow, now is a good time to assess how best to optimize your cash. In our upcoming Clarity Sessions, we’ll go through your cash reserve targets, cash yield optimization, and cash protections. In the meantime, please contact your Janiczek Team if you have any questions.

Wealth and Tax Management Chart of the Quarter

US Bank Deposits Are Shifting to Money-Market Funds
Cumulative change since end of 2022

Source:  Federal Reserve, Investment Company Institute

Janiczek Wealth Management – At a Glance

To learn more about Janiczek Wealth Management, click here.

Find Important Disclosures here.