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April 20, 2023

Market Update: The Big Picture

Investment Committee

Over the last several years, the average investor has faced a historic wave of new factors to consider. The onset of the pandemic created constant ripples to monitor, from new case numbers, to mortality rates, quarantine lengths, government stimulus, vaccine developments and rates, consumer activity, wage growth, unemployment, inflation, Fed activity… the list goes on.

After such a prolonged period of market stress, it can sometimes be helpful to take a step back and look at the bigger picture of where we stand.

Let’s pretend the JNBA Investment Committee was able to completely forget everything that occurred between 2020-2022. At the start of 2023, we would find unemployment near all-time lows and corporate profit margins near all-time highs. It being our job to assess how the stock market has been doing – ignoring the obvious hindsight bias and given those two very strong indicators of an economy’s health – it’s likely most of us would try not to overthink things and guess the market, too, must be near all-time highs. Furthermore, imagine we were told that there has been a once-in-a-generation pandemic, resulting in historic government stimulus, huge supply chain impacts, record inflation, and record Fed rate increases. Hearing that, we would likely think that the market could not possibly be making all-time highs with such heightened volatility.

While the hypothetical here is a bit far-fetched, taking a step back can help provide explanation and refocus on what really matters for long-term performance vs. the news of the day. While there has been a lot to like about large swaths of the economy these past three years, there remains plenty to be concerned about going forward.

When it comes to financial markets, there are a few established areas to focus on that we believe are worthy of our long-term attention. Here are the main areas we are watching and how those may change:

  1. Corporate earnings – Historically, stock market returns are very closely tied to corporate earnings over longer timeframes, and the next round of reporting season began late last week. After a disappointing 2022, the bar has been lowered for companies to show improved growth, but a challenging environment has left expectations low. The strong start to the markets for 2023 has likely made reactions more sensitive should any cracks in corporate profits begin to emerge.
  2. Fiscal/monetary activity – While Fed activity may be approaching an end point, the question remains for how long will rates hold once they have peaked. Fiscal policy is a constantly moving target, but an upcoming election year in 2024 and potential debt ceiling negotiations may result in more noise vs. meaningful impacts for 2023.
  3. Economic indicators – Unemployment and inflation remain the main barometers for trying to predict future Fed activity. A change in direction for either will likely see elevated reactions. While other measures such as consumer and business sentiment, manufacturing output, home sales, or consumer spending/debt usage may not directly or immediately impact corporate activity, they can have a large impact on valuations.

What this means for portfolios: Combining these factors, corporate earnings are likely the first new data points that could emerge to move the needle significantly. Monetary policy (Federal Reserve) is probably the most uncertain and will likely ebb and flow over coming months based on economic indicators.

Across most strategies, we recently increased our targeted equity allocation slightly, while also lowering cash and fixed income exposure. With a challenging 2022, a lot of recessionary concerns may have already been factored into equity markets. A strong start to 2023 could indicate some overreaction had occurred, and from here, the bedrocks of low unemployment and strong profits are difficult to change quickly and could continue to drive near-term performance. Combined with improved inflation trends and Fed policy potentially approaching an end to its tightening schedule, we are seeing market breadth increase – which would indicate that the global advance is likely more healthy and sustainable in the near term.

Concerns surrounding an eventual recession are valid, but we have yet to see a meaningful catalyst emerge to trigger a more pronounced slowdown. In the meantime, equity markets are historically biased to the upside, and we are willing to enjoy that optimism a while longer and avoid the missed opportunity that may occur from leaving too early.

As noted, earnings season is ramping up, and within our portfolios we are looking to remain patient, flexible, and nimble to respond to new information with a priority on long-term performance and diversification.

Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, LLC.

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