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.

  Important Disclosures

  Past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, there can be no assurance that the future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by Janiczek Wealth Management [“Janiczek”]), will be profitable, equal any historical performance level(s), or prove successful. The account performance information reflects the reinvestment of dividends (to the extent applicable), is net of applicable transaction fees, and is net of Janiczek’s investment management fee (if debited directly from the account). Account information has been compiled solely by Janiczek, has not been independently verified, and does not reflect the impact of taxes on non-qualified accounts. In preparing this report, Janiczek has relied upon information provided by the account custodian. Please defer to formal tax documents received from the account custodian for cost basis and tax reporting purposes. Please remember to contact Janiczek, in writing, if there are any changes in your personal/ financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you want to impose, add, or modify any reasonable restrictions to our investment advisory services. Janiczek shall continue to rely on the accuracy of information that you have provided. Please Note: Unless you advise, in writing, to the contrary, we will assume that there are no restrictions on our services, other than to manage the account in accordance with your designated investment objective. Please Also Note: This Report is  provided for information purposes only and is not an official statement from the account custodian or any product sponsor. Please compare this Report with account statements received from the account custodian. The account custodian does not verify the accuracy of the advisory fee calculation. Please advise us if you have not been receiving monthly statements from the account  custodian. A copy of our current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.janiczek.com.

  Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your Janiczek account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your Janiczek accounts; and, (3) a description of each comparative benchmark/index is available upon request.

  ANY QUESTIONS: Janiczek Wealth Management’s Chief Compliance Officer remains available to address any questions regarding this Report.

  Please Note: Unsupervised/Unmanaged Assets – Janiczek does not maintain any investment monitoring or performance responsibility for unmanaged or unsupervised assets and/or accounts. The client and/or its other investment professionals retain exclusive responsibility for the monitoring and performance of such assets and/or accounts. These assets are included for reporting purposes only.

  Please Note: Private/Alternative Investment Funds- The value(s) for all private investment funds owned by the client reflect the most recent valuation provided by the fund sponsor. However, if subsequent to purchase, the fund has not provided an updated valuation, the valuation shall reflect the initial purchase price. If subsequent to purchase, the fund provides an updated valuation, then the statement will reflect that updated value. The updated value will continue to be reflected on this report until the fund provides a further updated value. As result of the valuation process, if the valuation reflects initial purchase price or an updated value subsequent to purchase price, the current value(s) of an investor’s fund holding could be significantly more or less than the value reflected on this report. Unless otherwise indicated, the client’s advisory fee shall be based upon the value reflected on this report. Please Also Note: If the private fund is a private equity or real estate fund, the value reflected on this report will generally reflect the most recent “fair-value” determined by the fund sponsor, fund CPA or independent valuation service, rather than market value as used for all non-private fund liquid investment assets (i.e. mutual funds, ETFs, individual equity and fixed income securities, etc.).

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