January 11, 2023
Themes of 2022:
Decreased equity weightings across all portfolios in January of 2022 and increased cash and short duration fixed income.
As interest rates rose across the economy, we increased duration and credit risk toward the end of 2022.
Increased Metals and Mining and country weighting in Brazil on weakness in prices due to: Chinese lockdown, high levels of US dollar, and slowing growth. This reflects our view that the structural demand for metals will remain very high in the coming years while producers will be reluctant to increase production. Margins should remain very high.
Increased international weighting in diversified low-cost ETF’s.
Reduced UK exposure due to increased political and economic uncertainty in the UK specifically.
Marginal increase to US technology from a very low weight.
Current observations:
Inflation inputs pointing to much lower headline CPI numbers into mid-2023.
Fed remains adamant they will fight inflation by keeping rates high, but they acknowledge that the pace of hikes will be reduced and possibly stop hiking soon.
Market mood still suggestive of inflation worries and lower stock prices.
Energy transition is happening.
China is more pragmatic on growth and opening engagement with the West again.
On-shoring of tech and sensitive supply chains. Diversifying from China reliance.
Employers shedding workers. Wage gains should slow.
Wealth and incomes of the lower end of the income spectrum in the USA have benefited dramatically from Covid money and wage increases.
Outlook for 2023:
Always focus on the highest probabilities, and it looks to me like inflation will continue to fall into the middle of 2023. If correct, the Fed will likely stop hiking rates. We were not interested in fixed income 18 months ago, but we are very interested today in taking advantage of the higher yields being offered.
The Fed may try to keep rates high for too long, and this may cause the economy to slow too much. This suggests that equity prices may not rise in the short term. More uncertainty. This again suggests that our heavier weighting to fixed income for now makes sense.
Despite this uncertainty, I believe equity prices in the long term are excellent value compared to a year ago (obviously), and in the long-term prices of good companies will continue to rise. That suggests we should stay invested in our usual diversified approach.
Energy transition should benefit utilities and commodity producers. It looks to me like governments are disingenuous on how much wind, solar, and technology will transition our economies away from fossil fuels over the next 10 years. Mining companies and oil and gas producers are not expanding production fast enough because they lack enough government support in the long run. This should keep margins high and return excess capital to shareholders. Our weighting in metals and mining is relatively high, and we have scope to increase our oil and gas exposure. We have remained light on oil and gas because it has become very popular this year compared to a pariah industry in 2020.
Chinese re-engagement with the outside world should ramp up supply of manufactured products, increase monetary impulses and increase global growth on balance.
Supply chains will shift and change. This is a source of uncertainty which we are watching closely. It will result in increased investment in the USA on shore, but it is disruptive, and we need to be open minded about the implications.
Employers seem to have the upper hand over workers again. This should keep inflation well contained, but this is something that will develop over the course of this year. It will depend on not only how much growth slows, but many other factors.
Covid created many behavioral changes which I have discussed many times in the past. This continues to cause historical relationships in economic data to break down. Uncertainty is increased, and therefore we must keep an open mind when prognosticators and economists suggest that their models are telling us important information about future direction of the economy and stock prices.
I suspect demand will be structurally higher than other downturns caused by Fed rate increases because of all the Covid money that flowed to households, and because of the wage gains experienced at low-income levels. This is developing and we will continue to engage in game theory and adjust probabilities as we obtain more evidence.
Joseph Cardello, Principal August Wealth Advisors, LLC 51 Riverside Avenue, First Floor Westport, CT 06880 Direct (916) 461-9451 toll free (800) 985-9477 jcardello@augustwealthadvisors.com www.augustwealthadvisors.com
Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor; DBA August Wealth Advisors.
Trading instructions sent via email, fax or voicemail will not be honored. There is no assurance that these messages can be retrieved on a timely basis, nor is there any sure method of confirming the customers identity.
The information contained in this email message is being transmitted to and is intended for the use of only the individual(s) to whom it is addressed. If the reader of this message is not the intended recipient, you are hereby advised that any dissemination, distribution or copying of this message is strictly prohibited. If you have received this message in error, please immediately delete.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful. No reader should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence.
The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but August Wealth Advisors makes no representation as to their timeliness, accuracy, or completeness. Content in this material is for general information only and not intended to provide specific investment advice or recommendations for any individual. Investing involves risks including possible loss of principal.
留言