February 8, 2023
Increased investor confidence that the Federal Reserve’s rate hike cycle is nearing an end and renewed hopes for a shallow recession or soft landing underpinned the U.S. equity market rebound in January. Low-quality, heavily shorted stocks outperformed considerably during the month in what was likely indiscriminate bargain-hunting. The more optimistic economic outlook and decline in the 10-year U.S. Treasury yield also lifted long-duration/rate-sensitive stocks and helped push the S&P 500’s price-to-earnings multiple higher.
Investors were early to discount a recession and are now anxious to incorporate a better outlook for mid-2024 and beyond despite lingering risks. Still, limited economic slack could limit the potential growth upside. Moreover, while we expect consumer inflation will decelerate meaningfully in 2023, it will likely still top +3.0 percent at year-end versus the Fed’s +2.0 percent target.
Stock markets will likely continue to fluctuate between risk-on and risk-off periods as investors further assess the outlook for monetary policy, the economy, and earnings. Moreover, we believe it is a stock picker’s market and that earnings growth is crucial for sustained stock appreciation. Accordingly, we continue to invest opportunistically in high-quality businesses with unit sales growth, pricing power, and improving margins – and maintain a diversified portfolio of secular/cyclical growth and defensive stocks.
Capital Gains Distributions
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The Case for Dividend Growth Investing
Until recently, dividend-based strategies have lagged the market for several years primarily due to a combination of unprecedented outperformance from high “long duration” non-dividend paying growth stocks and the lagging performance of the defensive cohort within the dividend paying universe. Going forward, we believe there are several catalysts for sustained outperformance of dividend-paying stocks. Short term catalysts include continued market volatility and the risk of a recession. Long-term catalysts likely include more subdued market returns given the probability of prolonged sluggish economic growth, geopolitical risks, and somewhat higher inflation.