market review
Markets got off to a strong start in 2023. The S&P 500 rose 6.3% in January, while international stocks performed even better, with the MSCI All-Country World Index ex-US up 8.9%. Additionally, bond yields fell, leading the US Aggregate Bond index to rally by 3.3%.
Inflation and the path of the Fed’s interest rate hikes remained top of mind for investors in January. Despite some economic data suggesting a forthcoming recession, markets rallied based on expectations that the Federal Reserve will “pivot” in the second half of 2023 (i.e., reverse course from contractionary to expansionary monetary policy by lowering interest rates). Interestingly, this runs in contrast to the Fed’s own rhetoric and projections which remain hawkish. The disconnect between the market and the Fed can be seen in the futures pricing of the terminal rate. On January 31st, the market anticipated a Fed Funds terminal rate of 4.9%. The FOMC’s own projections as measured by the dot plot stood at 5.1%:
Source: Bloomberg
As of 1/31/2023
Equities
In Equities, our modest overweight to Emerging Markets via GEM (Goldman ActiveBeta EM ETF) helped performance. EM had an excellent month on the back on China’s re-opening. The weakening of the US dollar has been an additional catalyst. The DXY index, a weighted average of the dollar's value against six major currencies, has been in an uptrend for over 10 years. However, it declined 1.35% in January and is down 10.5% from the September 2022 peak. As the dollar continues to weaken, we think Emerging Markets, and International equities more broadly, may be entering a period of relative strength versus the US.
Source: Bloomberg
Our US equity exposure hurt performance relative to the global benchmark. Our value and defensive posture via IWD (US Russell 1000 Value ETF) and JEPI (US Premium Income ETF) hurt in the face of risk-on sentiment and lower yields that propelled growth and mega-cap stocks.
Moving forward, we are near-term neutral on equities but medium-term bullish. We are equal weight US equities but are selective and will continue to be defensive with our exposures.
Fixed Income
In Fixed Income, our short duration profile hurt performance relative to the longer duration benchmark. The US 10-yr yield stood at 3.9% on Dec 30 and by Jan 31st it had fallen to 3.5%. A such, short duration positions such as iBonds HY 2023 ETF (IBHY) and iBonds IG 2024 (IBDP) lagged. At the same time, Morgan Stanley EM Domestic Debt Closed End Fund (EDD) helped returns. Also, we recently entered a position in 2028 IG iBonds (IBDT) to extend our bond ladder, capture attractive yields and increase duration. IBDT helped returns.
The core of our Fixed Income portfolio continues to be a held to maturity, bond laddering strategy using diversified, low-cost, fixed income ETFs. These target-term funds combine the defined maturity and regular income of a traditional bond with the liquidity and diversification of an ETF. Holding these funds to maturity delivers a more predictable yield to maturity while reducing interest rate and re-investment risks.
We are moderately underweight fixed income as we move into February. While we believe inflation has peaked, it remains high, therefore eroding real returns. We are taking advantage of higher yields primarily through our bond laddering approach.
Alternatives
Our position in gold (GLD) posted positive returns on the month but did not perform as well as stocks or bonds. We anticipate volatility in the markets, and a defensive real asset such as gold offers an attractive risk-reward profile. We are underweight energy and industrial commodities but will be monitoring the technicals for signs of strength. We are bullish on the asset class in the medium term.
Detractors from Performance
Contributors to Performance
2023 High Yield iBonds (IBHY)
2024 Investment Grade iBonds (IBDN)
US Equity Premium Income ETF (JEPI)
Emerging Market Equities (GEM)
International Developed Equity (GSIE)
Emerging Market Sovereign Debt (EDD)
Underweight
Overweight
Fixed Income
Alternative Strategies
Cash
Gold
Disclosures: This information was produced by and the opinions expressed are those of Accuvest as of the date of writing and are subject to change. Any research is based on Accuvest proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however Accuvest does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. Any sectors or allocations referenced may or may not be represented in portfolios of clients of Accuvest, and do not represent all of the securities purchased, sold or recommended for client accounts.
The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results. Actual results may vary based on an investor’s investment objectives and portfolio holdings. Investors may need to seek guidance from their legal and/or tax advisor before investing. The information provided may contain projections or other forward-looking statements regarding future events, targets or expectations, and is only current as of the date indicated. There is no assurance that such events or targets will be achieved and may be significantly different than that shown here. The information presented, including statements concerning financial market trends, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons.