Market Commentary & Recent Rebalance Q4 2023

Written by Canty Financial - Published on October 25, 2023

Trade Rationale: Seizing Opportunities Amid Market Volatility

Following a weak September and October performance, the stock market has rallied significantly since the beginning of November. In the two weeks from October 27 through November 10, the S&P 500 jumped 7.2%. This was following a report of lighter than expected CPI/ inflation, and the possibility that the Federal Reserve may soon be ending its rate hike cycle.

Investor sentiment has been bolstered by these developments, leading to a more optimistic outlook for the end of the year. Market participants are now closely watching corporate earnings reports and consumer spending data to gauge the robustness of the economy. While the recent rally may signify a collective sigh of relief, it's crucial for investors to remain vigilant.

Key Takeaways From Our Recent Rebalance:

  • Overweight U.S. Stocks: We recommend a moderately overweight allocation to stocks and cautiously adopting a "risk-on" approach. This aimed to leverage the recent market pullback and prepare for potential positive developments in U.S. economic growth and corporate earnings.
  • Focus on U.S. Growth and Technology Stocks: We suggest leaning further into U.S. growth and technology sectors, emphasizing large-cap stocks that exhibit promising growth prospects.
  • Decrease Exposure to European Stocks: Due to weakening corporate earnings signals and increased vulnerability to rising energy prices and geopolitical turmoil, we advise reducing exposure to European stocks and moving underweight in international Developed Market (DM) equities.
  • Increased Exposure to Attractive Emerging Markets: While pruning underweight positions in Emerging Markets (EM), consider increasing exposure to select EM countries with robust earnings prospects, such as Taiwan. This move is aimed at safeguarding the portfolio against challenges in other EM regions.
  • Slight Increase in Credit Risk: For portfolios weighted toward bonds, consider adding some credit risk. This decision can help capture higher yields and maintain a modest overweight to duration for diversification purposes.

Trade Rationale: In October 2023, we once again found ourselves contending with the seasonally weak market conditions that have historically haunted investors. This period, coupled with rising interest rates and declining liquidity, led to downward pressure on both stock and bond prices. However, in our view, this setback was an opportunity to add to stock positions, given the growing strength of the U.S. economy, which appears more resilient than some may believe.

U.S. corporate earnings have pleasantly surprised and continue to exceed analyst expectations, which historically bodes well for future stock returns. The U.S. Federal Reserve's GDPNow estimates for economic growth have also risen significantly. These growing expectations are likely driving the recent increase in real interest rates. Importantly, this shift benefits U.S. stocks, particularly large-cap companies.

Moreover, the Federal Reserve's approach may also contribute to the "risk-on" sentiment. While a significant policy shift is not our base case, there's more potential upside than downside in how the Fed manages its policies. With inflation easing due to improved supply chain conditions and increasing geopolitical tensions in an election year, the Fed might respond with more accommodating measures, boosting market confidence.

Our optimistic stance primarily centers on the U.S., although a temporary reversal of the dollar's strength may open opportunities for emerging markets to excel, so we have reduced our underweight position in EM stocks. We have also hedged against the possibility of rising oil prices, which could disrupt consumer demand and affect this year's growth-oriented assets. Geopolitical strife and supply constraints raise concerns about increased energy prices, so we've taken measures to protect against this risk.

In summary, our strategy for the current market environment is to capitalize on U.S. economic strength and positive corporate earnings while mitigating potential global risks. We recommend overweighting U.S. stocks, particularly in growth and technology sectors, and maintaining a cautious yet opportunistic approach in this evolving investment landscape.

Please call us at 518-885-3230 or 239-435-0090 to let us know if you have questions.  We welcome clients who are interested in financial planning, opening investment accounts, or adding to existing investment accounts.

Bill Canty, CFP®, CPA, Financial Planner

Ed Canty, CFP®, Financial Planner

Joe Canty, Financial Planner

Maureen Walsh, EA, Tax Advisor

Tina Alteri, CPA, Tax Advisor

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