The combination of continued global economic expansion with moderating inflation provided a favorable backdrop for financial markets in the first half of 2023. Corporate earnings results were generally better than expected, which improved investor sentiment toward equities. The US market rally was led by mega-cap technology stocks and fueled by excitement around artificial intelligence. Yet, September was a tough month for risk assets and equities in particular. Click here to read a brief investment market commentary.
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Colony Market Update
Despite some weakness thus far in August, the combination of continued global economic expansion with moderating inflation has provided a favorable backdrop for riskier assets thus far in 2023. So far, the economy and corporate profits have proved more resilient than the consensus expected. Despite an inverted yield curve and deteriorating leading economic indicators, the US economy has avoided recession. However, we worry that the lagged effects of monetary policy tightening will become a bigger headwind to corporate earnings. With US stock valuations still stretched, we believe some caution is still warranted. In terms of tactical portfolio positioning, we remain underweight to public equities, particularly US large-cap stocks, in favor of increased exposure to fixed income and cash given more attractive yields.
Please see the attached update for our detailed update.
If you have any questions or would like to discuss further, please don’t hesitate to reach out.
Charitable Lead Trust: Planning Benefits and Pitfalls
Ultra-affluent families with excess capital often have dual goals of charitable giving and preserving wealth for future generations. The Charitable Lead Trust (“CLT”) is an ideal vehicle for accomplishing these competing objectives.
Please click here to read more.
Colony Market Brief
Recent market concerns have centered on the banking crisis that began with Silicon Valley Bank, but attention has now turned to the debt situation of the United States Government. The US hit its $31.4 trillion debt limit on January 19, which means the government cannot technically issue any new debt—and lawmakers have yet to agree on raising the debt ceiling. Since January, the US Treasury has been using various “extraordinary” measures to continue paying the government’s obligations in full and on time—but those funds may run out in early June, triggering a sense of urgency around the debt ceiling debate. We’ve prepared a brief commentary piece to share some perspective.
Colony Market Brief
Given the news flow over the past few weeks, accompanied by financial market volatility, we are reaching out with a brief commentary piece to share our perspective. The attached provides a summary of our assessment of the macroeconomic backdrop and current portfolio positioning
IRS Inflation-Adjusted Tax Items
In late December, Congress passed a significant omnibus budget bill. Included was the Setting Every Community Up for Retirement Enhancement 2.0 Act of 2022 (“Secure Act 2.0”), which contains various retirement and other changes that practitioners and their clients need to be aware of. It provides new incentives for employers to offer retirement plans to their employees and for employees to participate and improve their retirement security.
Secure Act 2.0 aims to help employees and their beneficiaries, owner-employees, small businesses, and retirees, and ease costs, administrative burdens, and penalties for inadvertent mistakes. It will also require most plans to be amended to comply with some of its provisions. The 2023 omnibus bill containing the new provisions was signed into law by President Biden on December 29, 2022. Highlights of the new legislation are included in this memorandum after a summary of the many new IRS inflation adjustments that apply to various tax items in 2023.
Colony Market Review & Investment Outlook
In addition to a one-page executive summary, our most recent Investment Commentary includes a review of recent financial market results, our assessment of the macro backdrop, and an update on portfolio strategy. Here’s an overview:
- 2022 proved challenging for most asset categories as financial markets battled several headwinds, including high inflation, hawkish central banks, the Russia-Ukraine war, and lockdowns in China.
- The broad equity market sell-off improved valuations, but US stocks may not be adequately discounting the risk of a decline in corporate earnings—although a US recession is widely anticipated by economists. A mild recession within the next 12 months is also our base case assumption, but it’s not a certainty given the strength of the labor market.
- To combat inflation, the US Federal Reserve has pursued one of its most aggressive rate hiking cycles on record. Bond yields have returned to levels not seen since 2008, indicating better forward-looking returns. However, the uncertain macroeconomic environment and geopolitical backdrop suggests that volatility across asset classes will remain elevated.
- Proper portfolio diversification remains as important as ever. In terms of tactical positioning, we maintain a slight underweight position in core/investment grade bonds, but recommend increasing exposure given recent weakness and compelling yields. We continue to target an underweight position in US large cap stocks, but remain fully invested in more attractively valued international stocks. We also continue to target an overweight position in real assets like commodities.
Click here to read the full commentary.
Cyber Webinar
The internet plays a huge role in just about every aspect of daily life, both at home and at the office. At Colony, we rely on technology for managing our business and communicating with you. You rely on technology when working with us, your business, and home management. We know you can feel exposed or vulnerable when there’s a security breach or information hack in the news. Further, cybercriminals are looking for new ways to hack and scam their way through security measures, often relying on human error.
Our mission at Colony Family Offices is to provide financial peace of mind to families with significant wealth. Technology and Finance are increasingly interconnected. We recently partnered with Fidelity to offer a Cyber Training Webinar. Gary Rossi, Head of Personal Insights Security Program for Fidelity Investments and former special agent for the FBI, led a discussion about security topics and tips for protecting your personal information, including:
1. Make Yourself a Difficult Target for Cybercriminals
2. Your Digital Footprint – Understand and Protect It
3. Protect Loved Ones from Elder Scams
4. Keep Your Home Secure – People, Possessions, and Information
5. Q&A
Here are links to access the “Personal Security Brochure” and “Make Yourself a Difficult Target for Cybercriminals” information referenced in the video below.
Colony Market Update
To state the obvious, it’s been an extremely difficult year for investors as markets digest higher inflation, rising interest rates, and geopolitical uncertainty. Both stocks and bonds have experienced broad declines while asset categories that benefit from higher inflation, such as commodities, have generated gains. As of the close on Friday, September 16, 2022, the broad global equity market (MSCI All Country World Index) has declined by almost -20% so far in 2022 while the technology-heavy NASDAQ 100 Index is down over -26%. Traditional “safe” assets, like investment grade fixed, income have also experienced declines as bond yields increased sharply over the past several months alongside monetary policy tightening. For example, the Barclays 1-10 Year Municipal Bond Index has declined -6% on a year-to-date basis in 2022.
The economic outlook has deteriorated, and we assume a continued deceleration in US and global growth driven by tightening monetary policy in response to sustained high inflation. The near-term (next 12 months) recession risk continues to rise and represents a reasonable conservative scenario, but is not a certainty. Most relevant to investment strategy is assessing the potential severity of any economic downturn and its impact on corporate earnings and interest rates—and what is being discounted in asset prices. Given the strength in corporate and consumer balance sheets, we believe any potential recession is likely to be brief and shallow—perhaps a more “normal” type of cyclical recession rather than akin to the 2008-2009 financial crisis or the 2000-2002 dotcom bubble burst. And the sharp fall in stock prices already experienced this year suggests markets have priced in some expectation of meaningful earnings decline.
The economic and geopolitical backdrop remain highly uncertain; therefore, market volatility is likely to remain elevated. While risks have risen, starting point valuations have also improved—indicating better prospects for future long-term returns. In the current environment, we believe that proper diversification beyond traditional US stocks and bonds remains as important as ever. Our tactical portfolio positioning themes include:
- Continue to target an underweight position to core/investment grade fixed income, but add to municipal bonds given recent weakness and more compelling yields. High yield credit remains attractive given recent spread widening.
- Maintain an underweight to US stocks while emphasizing higher quality companies. Despite more attractive valuations following recent declines, we remain somewhat concerned that earnings expectations may still be too high.
- Remain fully invested in non-US stocks that trade at a steep discount in valuation relative to the US, as a lot of bad news and negative sentiment is already priced into these markets.
- Continue to target an overweight position to public “real assets” like commodities and energy-related stocks given the risk of sustained higher inflation.
- Where appropriate, continue to develop private equity and real estate investment programs to potentially enhance long-term returns.
Please see the attached presentation that provides our assessment of the market backdrop and shares our views on portfolio strategy going forward.
Colony Market Update
After posting strong gains over the last couple of years, asset prices have stumbled in the first 5 months of 2022 as financial markets digest higher inflation, rising interest rates, and geopolitical uncertainty. Both stocks and bonds have experienced broad declines while asset categories that benefit from higher inflation, such as commodities, have generated gains. Financial markets have seen a notable shift from the benign volatility environment observed throughout much of the past several years. Between January 1, 2022 and May 13, 2022, over 85% of days have seen the S&P 500 trade in at least a 1% daily range.
The economic and geopolitical backdrop remain highly uncertain—therefore market volatility is likely to remain elevated. As a result of higher commodity prices and tightening monetary policy, economic growth is set to slow. Despite this deceleration, we believe the risk of a near-term (next 12 months) recession is still relatively low given healthy consumer and corporate balances sheets and a strong labor market.
As of the date of posting, corporate profits (as measured by reported earnings) have remained resilient. Yet, valuations have discounted a good bit of bad news. According to BCA Research, global equities are trading at less than 16-times forward earnings, which is down from more than 20-times late last year. Outside of the US, stocks are trading at less than 13-times forward earnings. We’d also note that some of the forces that have pushed down stock prices may start to abate. For example, the inflation data has at least become less bad. In the US, core goods inflation fell by 0.4% month-over-month in April—the first outright decline since February 2021. And in China, the 7-day average of new Covid cases has fallen by more than half since late April. China’s domestic production of Pfizer’s Paxlovid anti-Covid drug is also starting to ramp up, which should allow for some easing in lockdown measures later this year.
In the current environment, we continue to believe that proper diversification is as important as ever. In terms of tactical portfolio positioning, we continue to target an underweight position to core/investment grade fixed income, but recommend adding to municipal bonds given recent weakness and more attractive yields. We also maintain an underweight to US stocks on valuation concerns while emphasizing higher quality companies. We advocate adding to emerging markets stock positions given recent weakness and more attractive valuations. We also continue to target an overweight position to “real assets” like commodities and energy-related stocks given the risk of stickier inflation, but recommend trimming exposures back to targeted weights on recent strength.
Please see the attached presentation that provides our assessment of the market backdrop and shares our views on portfolio strategy going forward.