Last week we saw the MLB trade deadline come and go, leaving some teams in a primed position to make the post season, and others resigning their hopes for this year and setting their sights towards the 2024 season. Like the strong start our local baseball club, the Orioles, had this year, the second quarter of 2023 saw a continuation of the rebound from the previous year’s inferior performance, as a pause in the Fed’s rate hike campaign, stronger-than-expected corporate earnings, and the relatively drama-free resolution of the debt ceiling allowed major equity indices to drift steadily higher. For the most part, investors are riding the highs and chalking up wins, but the scouting report says that cracks in the economic foundation are emerging, such as regional bank failures, more Fed rate hikes, and a downgrade to U.S. debt.
Just as many MLB teams made trades to improve their team through the trade deadline, investors may look to bring in some reinforcements of their own to ensure more wins in the second half of the year.
So, what could investors be looking to do during the trade deadline?
1) Bolster the Team’s Bullpen
When a pitcher comes out of the bullpen late in the game, they are often brought in with the intention of limiting runs and saving the game for a win for their team. Whether it’s a larger allocation to defensive sectors, bonds, or high yielding cash alternatives, investors may be looking for similar investments to “save” their portfolios in the latter half of the year as potentially significant risks remain to the economy and market. Notably, the economy has not yet felt the full impact of the Fed’s historically aggressive hike campaign, and while the economy has proved surprisingly resilient so far, we know from history that the impacts of rate hikes can take far longer than most expect to impact economic growth. As such, we could see the economy begin to slow more as we move into the second half of 2023. The key for markets will be the intensity of that slowing, as at these valuation levels stocks are not pricing in a significant economic slowdown.
2) Add Depth on Defense
The timeless sports adage, “Defense wins championships,” has proven its merit time and again. While offense may dazzle with excitement, a formidable defense is the cornerstone of success in any sport. In the world of investing, the same principle holds true: a strong defense is crucial to weathering economic uncertainties and achieving long-term growth. If the economy faces potential challenges later this year, such as decelerating GDP growth or worsening consumer data, investors may feel the need to reevaluate their asset allocation. A rotation out of growth-oriented and riskier asset classes and into sectors that are historically defensive by nature may prove to be a prudent move in such circumstances. Much like a well-structured defense shields a team from defeat, investing in these defensive sectors could provide a cushion against market downturns and economic slowdowns.
3) Build a More Well-rounded Team
In baseball, it is incredibly rare to see a team win a championship on the backs of just one or two star players. You need a team that has great players at every position to ensure that you have very few weaknesses. While investors logged gains through the first half of 2023, many did not feel the full extent of the +16.89% advance of the S&P 500 as its performance has been carried by just a few names. In fact, through the end of June, the median stock listed on the S&P has returned +5%, while the median return of S&P sectors is just +3.8%, leading to the Equal Weight S&P 500 Index to vastly underperform its market-weighted counterpart. Whether an extended rally broadens out to more names or not is hard to know, but many investors with diverse portfolios will hope for a more expansive participation.
Our Outlook: Bearish
Markets have been whistling past the graveyard while the economy’s problems mount. Our forecast for the second half of 2023 is the Winter season. We continue to focus on our highest conviction themes and pockets of opportunity but remain focused on avoiding the potential pitfalls from the threatening recessionary conditions that lie ahead.
How Can we Help
Mapping and measuring economic factors is our scouting report. At GGM, aligning your investments with the prevailing economic environment is just one of the ways we strive to add value to your portfolio. If you are concerned about whether your investments are primed for the current market and allocated to meet your objectives, we recommend our complimentary portfolio checkup. Contact us today!