B&F Views Second Quarter 2023

Quarterly Funding Overview 

The economic system grew by 2% within the first quarter and is anticipated to develop by about 2.3% within the second quarter, primarily based on broadly adopted indicator from the Federal Reserve Financial institution of Atlanta. At the same time as most economists anticipate a slowdown in financial progress and an increase in unemployment, the broadly anticipated recession of 2023 stays elusive. 

The inventory market rally, which started within the fourth quarter of 2022 continued all through the primary half of 2023, buoyed by a resilient labor market and a pause in rate of interest hikes by the U.S. Federal Reserve. The S&P 500 Index of enormous U.S. firms rose 8.7% within the second quarter and is up 16.9% year-to- date. The rally has been powered primarily by massive (largely expertise) firms, with smaller firms (represented by the Russell 2000 Index) rising solely 5.2% within the quarter and eight.1% up to now this yr. The MSCI EAFE index of worldwide shares rose 3.0% within the quarter and is up 11.7% this yr. The bond market has been unstable, swinging between optimism that rate of interest hikes had been over and acceptance that extra are coming. The benchmark 10-year Treasury yield ended the second quarter at 3.81%, roughly the place it started the yr however up for the quarter. In consequence, bonds misplaced 0.8% throughout the second quarter however have nonetheless gained 2.1% for the yr as larger yields helped to offset falling costs (bond costs fall when market rates of interest rise). Excessive Yield “Junk” bonds rose 1.8% throughout the quarter, representing optimism about company funds, no less than within the short-term. The Dow Jones U.S. Actual Property Index rose 2.4% throughout the quarter.

Economic system

As soon as once more, the economic system shouldn’t be at the moment in a recession, although the chance that one is coming has risen in latest weeks. Trying on the treasury yield curve, the place short-term rates of interest are considerably larger than longer-term charges (the yield curve is inverted), this means a reasonably excessive chance of a recession within the near-term. An inversion of the yield curve doesn’t assure {that a} recession is coming, but it surely has preceded each recession since 1950.

Extra importantly, wanting beneath the hood at totally different segments of the economic system, a number of elements counsel that enterprise and client spending are more likely to sluggish within the coming months. From layoffs in key financial sectors like expertise to weak point in business actual property markets and low private financial savings charges, the economic system seems to be slowing from its present tempo of two% progress. That doesn’t imply a recession is imminent, but it surely does imply that there’s much less room to soak up shocks if (or extra doubtless when) they arrive.

Q2 2023


The Fed’s marketing campaign to focus on inflation by elevating rates of interest appears to have been profitable. Inflation has fallen from its excessive final summer time of 9.1% to simply 3.0% (year-over-year) in June. Trying on the elements of inflation, most have cooled significantly. Even housing prices are beginning to ease a bit. We anticipate to see inflation moderating to round 3.5% by year-end and maybe 2-3% by the top of 2024, which might enable the Federal Reserve to start decreasing rates of interest. That is what the market appears to be anticipating on condition that long-term Treasury rates of interest are decrease than short-term charges.

The wild card stays the labor power, which has shrunk over the previous few years. Ability gaps (the distinction between what employers want and what they’ll discover within the market) stay stubbornly excessive, maintaining upward strain on wages whereas additionally placing a lid on how excessive unemployment can rise. Employment is a lagging indicator of financial well being, so we’ve got to watch out putting an excessive amount of hope in low unemployment (which is all the time lowest proper earlier than a recession begins), however the power of the labor market does give some forecasters the arrogance to counsel that any impending recession could be comparatively delicate or short-lived (or each).

Progress is wanting a bit firmer world wide than it did even earlier this yr. Whereas manufacturing has hit a little bit of a tender patch, most nations proceed to indicate some degree of growth. Decrease power costs in Europe and a post-COVID restoration in China are causes for some optimism.


Many elements have contributed to a slowing economic system, and it’s not a foregone conclusion {that a} recession should happen. As we famous final quarter and above, it does appear extra doubtless, although the consensus appears to level to a recession starting in 2024 fairly than later this yr. The inventory market resilience is essentially a mirrored image of a mixture of better-than-expected earnings and a restoration from decrease valuations reached after final yr’s selloff. It stays to be seen whether or not that optimism can be rewarded with continued positive aspects in inventory costs or renewed promoting on financial weak point. What does appear doubtless is elevated volatility within the coming months as buyers attempt to reassess the chances of progress and weak point. Main shocks like a authorities shutdown or a major strike (UPS) can’t be dominated out, both.

Trying ahead, present valuations of shares and bonds stay considerably engaging even after the quarter’s robust efficiency. 5-year anticipated returns on investments have improved considerably for the reason that market peak in 2022. Although shares have risen lately, bond markets have priced in a reasonably vital discount in rates of interest, signaling an expectation of a recession within the coming quarters. We might not be shocked by a drop in inventory costs on financial weak point, adopted by a robust restoration by the top of 2024, although different situations are additionally attainable.

One factor that may be a bit disconcerting is simply how slender the inventory market has develop into, which means that the positive aspects we’re seeing within the indexes are actually powered by only a handful of huge (largely tech) firms. This habits is usually noticed late in a bull market.

Extra to the purpose, it’s almost inconceivable to time inventory market actions like we’ve described above. Traditionally, intervals when client sentiment concerning the economic system had been at its worst had been a few of the finest occasions to purchase shares. Fairness costs are more likely to be unstable this yr as buyers weigh the influence of a looming (or prevented) recession and negotiations in Washington round funding the federal government for 2024.

Our Portfolios

Our inventory publicity is at the moment broad primarily based and weighted in direction of massive U.S. firms. Our worth bias, which helped final yr as high-flying progress firms struggled with rising rates of interest, has been a little bit of a detractor this yr as buyers have shrugged off excessive rates of interest and paid up for the shares of firms which are displaying earnings progress. If a recession does happen, we’d anticipate this development to reverse once more and people larger P/E (costly) shares ought to fall more durable than the remainder of the market. Our worldwide publicity stays balanced between hedged and unhedged investments and advantages from extra engaging valuations than comparable U.S. equities.

At this time’s larger rates of interest imply that anticipated bond returns going ahead are extra engaging than they had been a yr in the past. Extra importantly, if our expectation of a recession is realized, rates of interest will doubtless settle again down, offering good returns to bonds ought to shares falter heading right into a recession. Bonds needs to be a greater diversifier this yr, particularly if markets are right in forecasting decrease rates of interest heading into 2024. Even when that expectation is unrealized, longer-term rates of interest have risen fairly a bit already and are unlikely to rise considerably. And as we’ve identified, the upper present yields assist to offset the implications of additional will increase in long-term rates of interest.

In brief, we proceed to anticipate volatility as buyers put together for a attainable recession and alter their estimates for inventory costs accordingly. We’ll use such intervals of volatility to rebalance portfolios and decide up shares (or bonds) at discounted costs, to higher revenue from the restoration that has adopted each single market decline for so long as there have been markets.

As all the time, we’re right here for you and are prepared to supply the steerage and planning you anticipate from us. You probably have any questions on your investments or your monetary plan, we’d love the chance to debate them with you.

International Inventory Market Efficiency

The chart under reveals the change in international fairness markets all through the quarter. Juxtaposed over the market efficiency are a few of the key occasions that occurred throughout the interval. Generally as we get to the top of a unstable interval, it’s troublesome to look again and bear in mind every part that occurred alongside the way in which.

Q2 2023

Previous efficiency shouldn’t be a sign of future returns. Info and opinions supplied herein mirror the views of the writer as of the publication date of this text. Such views and opinions are topic to alter at any level and with out discover. A few of the info supplied herein was obtained from third-party sources believed to be dependable however such info shouldn’t be assured to be correct.

The content material is being supplied for informational functions solely, and nothing inside is, or is meant to represent, funding, tax, or authorized recommendation or a advice to purchase or promote any varieties of securities or investments. The writer has not thought-about the funding goals, monetary state of affairs, or specific wants of any particular person investor. Any forward-looking statements or forecasts are primarily based on assumptions solely, and precise outcomes are anticipated to range from any such statements or forecasts. No reliance needs to be positioned on any such statements or forecasts when making any funding resolution. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a tenet. No funding resolution needs to be made primarily based solely on any info supplied herein.

There’s a threat of loss from an funding in securities, together with the chance of complete lack of principal, which an investor will should be ready to bear. Various kinds of investments contain various levels of threat, and there may be no assurance that any particular funding can be worthwhile or appropriate for a specific investor’s monetary state of affairs or threat tolerance.

Blankinship & Foster is an funding adviser registered with the Securities & Change Fee (SEC). Nonetheless, such registration doesn’t suggest a sure degree of talent or coaching and no inference on the contrary needs to be made. Full details about our providers and costs is contained in our Type ADV Half 2A (Disclosure Brochure), a replica of which may be obtained at www.adviserinfo.sec.gov or by calling us at (858) 755-5166, or by visiting our web site at www.bfadvisors.com.