The first six months of the year were filled with many headlines that may have led the average investor to think 2023 is going to be as bad as 2022. From the major bank failures, the debt-ceiling dance, the Canadian wildfires, and the Wagner group rebelling against the Russian Military, the news has seemed rather bleak.

Positivity on the horizon?

However, the S&P 500 reached its highest level since April 2022 by increasing 15.9% for the first six months of 2023.[1] The Dow Industrials are up 3.8%, Nasdaq is up 31.7%, and the Russell 2000 is up 7.2%.[2] These results mark the fourth-best first half in the last 25 years. Big tech led the way with the usual cast of characters – Alphabet (Google), Amazon, Apple, Microsoft, Nvidia and Tesla to name a few. The prospect of artificial intelligence appears to be driving these results.

The banking crisis in March led to rising rates in the second quarter of 2023 but the stress on the banking sector has diminished since the JP Morgan takeover of First Republic Bank in early May. The Federal Reserve guarantee of deposits over $250,000 appears also to have eased customers’ concerns about the safety of their deposits.

Lingering recession concerns

If you listened to the news for the first six months of this year you would have heard a lot of negative predictions. The market pundits have been predicting a recession for months. Concerns were expressed that inflation was not falling fast enough. The banking system was going to collapse. The Federal Reserve was going to overshoot its target and tighten monetary policy too much, and finally the market rally was too narrow.

Two more potential rate hikes on the horizon

At its June 13-14 meeting, the Federal Open Market Committee did not raise rates for the first time since March 2022, but it raised the possibility of two more rate hikes this year. The recent jobs report indicated that companies are still adding jobs, but at a slower pace. The biggest job gains were found in government jobs, health care, social assistance, and construction. The strong jobs market will most likely lead the Federal Reserve to implement the projected rate increases later this summer and fall. The Federal Reserve is walking a tightrope – trying to get inflation down without pushing the economy into a recession.

So, how does this information impact our investment philosophy?

We remain slightly underweight on the equity side of the portfolio as we expect US economic growth to slow down a little more and thus are committed to quality positions in our portfolios. Our investments seek companies with high returns on capital, solid balance sheets, low debt, and reasonable valuations. In addition, we remain defensive with our dividend growth strategy. Companies that have a record of paying dividends and growing that dividend over time tend to be well-run companies that can handle tough markets.

It is important to remember that your investment portfolio is only one piece of your overall financial plan. It is easy to look at the market returns and wonder why my portfolio did not return 31% like the Nasdaq has so far this year. Our goal is to provide you with a diversified portfolio that manages the market risk based on your personal goals and risk tolerance. Sometimes, a well-diversified portfolio will lag the market when it is up, however, our goal is to minimize the downside when the market falls. Sticking to your asset allocation is part of a long-term investment philosophy that prevents you from making impulsive investment decisions driven by short-term market fluctuations. It is our job as your investment advisor to keep you focused on your long-term goals and help you achieve them.

As always, if you have any questions or concerns, please do not hesitate to reach out and schedule an appointment.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by KLR Wealth Management LLC “KLR” or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from KLR. Please remember to contact KLR, 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 would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.

KLR Investment Advisors LLC is a registered investment advisor dba KLR Wealth Management LLC. Advisory services are only offered by KLR Investment Advisors LLC and to clients or prospective clients where KLR Investment Advisors LLC and its representatives are properly licensed or exempt from licensure.

[1] Washington Post, June 30, 2023.

[2] Id.