Three months ago we along with much of the consensus were forecasting an imminent recession in Europe with the US following not far behind. We were also worried that China’s zero COVID policy would negatively impact China’s economy resulting in another year of anemic growth. We further viewed that Central banks worldwide would have to contend with sticky inflation. And yes, we still have a war in Ukraine, Covid, inflation and rising interest rates. Despite all, economies worldwide held up better than we were expecting. However, as of this writing we are in the midst of a banking crisis where regulators had to step in to provide solvency amid pressure coming from regional banks.
In short, three months in and we are still uncertain as ever. In these circumstances, knowing that we don’t know is important but so is knowing that we must still make good decisions under extreme uncertainty. Having said that, as a firm we are holding over 17% in cash with a mixture of money market funds, CDs and bonds providing favorable returns considering the volatility on the equity side of things. We are very well positioned to “jump back in” on equities once we see signals leading to growth opportunities. This could happen if inflation falls. However, our outlook remains cautious. Our household benchmark (VBIAX) is up 5.59% as of March 31, 2023. This is deceiving considering it was in the mid 3s on the 28th. All of this adds up to a challenging outlook for risk assets with sharp ups and downs. Follow Ycharts for a month-by-month performance: S&P 500 Monthly Return (ycharts.com)
There are some positives though. We are focusing more on quality fixed income assets considering their lower risk reward. If we can continue fixed income shopping, we can achieve favorable returns albeit, we still want growth from equities to outpace inflation. Once we have a clearer picture away from war, inflation, bank solvency and labor shortages who knows. Things could get a lot better.
As always, we welcome your thoughts and feedback. Should you want to discuss this or any other concern, please use this link to schedule a conference call/video.