Resilience has been the prevailing theme in markets over the past year. Not only has the economy avoided a highly anticipated recession despite suffering through downturns in Housing and Banking, the S&P 500 Index has soared off its 2022 lows to start the year up 16%. As we are now firmly on the other side of the pandemic and the bulkheads of Labor, Consumption and Investment have kept the US economy afloat, we believe optimism is warranted that growth can accelerate from here.
Despite narrow leadership in Stocks to start the year, we currently see a broad range of opportunities not restricted to any one segment of the market and have been allocating accordingly. While inflation continues to decline, labor markets remain strong and reinvestment in US manufacturing continues unabated, we are encouraged that the U.S. can continue to shirk off the Federal Reserve’s unprecedented pace of interest rate hikes. Looking to the second half of the year and beyond, we are positive on our portfolio and would point out a few key elements of our strategy:
- At 15%, cash reserves are running significantly below levels reached last Fall, as buying activity has exceeded selling at a rate of nearly 3 to 1 over this time.
- From here, we are in “wait and see” mode with respect to lowering our cash target further, as Stock prices may take a pause after a fast start.
- Our allocation to the Industrial sector has increased substantially, as we have added stable, highly profitable businesses where we are seeing signs of a nascent turnaround.
- We remain vigilant on buying Treasury Bills with excess cash in portfolios, as yields remain attractive, as the Federal Reserve continues hiking rates.
Furthermore, we are focused on the following themes driving our investment process:
- Capital Investment is booming in the United States, as companies aim to depend less on foreign manufacturing to fortify supply chains and national security.
- The Federal Reserve is unlikely to return to a low interest rate environment in the near term, and reinvestment opportunities in fixed income portfolios should remain attractive over time.
- Capital availability has become increasingly scarce, curtailing speculative activity in alternatives such as crypto currency, Private Equity and Initial Public Offerings.
- Investment in green energy – such as battery technology, electric vehicles, Electric power generation is still in its early stages, providing a long runway for our stocks tied to these spaces.
- Inflation continues to decelerate toward the Federal Reserve’s target of 2%, however it remains an open question how much economic damage will occur to reach this goal.
- Future US growth opportunities remain more attractive than the rest of the world, justifying our focus on domestic versus foreign stocks.
We welcome the market’s shift towards Quality Growth stocks to start the year and have been rewarded for our patience in putting money back to work when things seemed most dire. Looking forward, we see better things to come while remaining conservative in our approach.
As always, feel free to give us a call to discuss any changes in your objectives, circumstances, or any questions you may have.
Daniel A. Kane, CFA
James W. Mersereau, CFA
Stephen F. Knapp, CFA
Director of Research