Investment Strategies for 2023

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By Maurice Stouse, Financial Advisor and Branch Manager

The new year has begun for investors. After watching both the stock and market experience significant drawdowns in 2022 (a rarity for the two to move in tandem), people wondered what the new year might bring. Thus far, we have been showered by the media with talk of recession, stoking fear in the hearts and minds of consumers. Eventually, consumers begin to over worry and they begin to snap their wallets shut. This, however, does not seem to be the case, at least not yet. At this writing, while the economy has most definitely slowed, many companies continue to make money. Seventy-one percent of companies reporting their Q4 earnings have surpassed expectations.

We are left to wonder which is the greatest evil: a recession, inflation or deflation. Inflation over time erodes the standard of living and is not sustainable. Deflation, we think, is the worst of outcomes as it is a collapse of demand and it eventually pulls the economy down, perhaps into a depression. We are reminded of a quote Ronald Reagan repeated more than once: A recession is when your neighbor loses his job, and a depression is when you lose yours. A recession is an economic reset and investors are reminded to take note that when the economy is seemingly at its worst, that is the time to invest in stocks if they are long-term, growth-oriented investors and have the tolerance for the risk.

What is driving us here?
The Federal Reserve, whether we like it or not, has significant influence in the economy. The Fed has taken its Federal Funds Rate to 4.5 percent and by the time you read this may very well be at 4.75 or 5 percent. What does that rate do? First of all it is the rate it pays to banks and to money market mutual funds for deposits and investments made overnight.
The Fed has an average of $3 trillion on deposit each night from banks. It also has about $2.6 trillion from several money market mutual funds. If banks put that money at the Fed, they are not lending it. If investors and savers are putting money in money market mutual funds, they are not investing it in stocks, bonds, businesses or a host of other things. Since 2008, the Fed has used the federal funds rate to slow an overheated economy, usually one that manifests itself by the inflation read. If less money is available to the economy, that in theory should slow demand, bringing inflation down. It seems to be working. Some worry, however, that it may end up working too much and that the economy will crash land versus soft land. We will have to see.

The impact of this can be seen in the leveling off of interest rates.
Short-term rates are remarkably higher than-long term rates. Investors take note that in times like these, that is by design. That can work to the advantage of savers and those wanting to have lower-risk investments with higher returns than in the past. If the inverted yield curve (where shorter rates are higher than longer term rates) persists, a slower economy will bring down inflation and also long-term rates, including mortgage rates. The implication is that investors should consider investing in longer term bonds be those U.S. Treasuries, municipals or corporate bonds. For retirement accounts, investors also might consider taxable municipal bonds for their quality relative to corporates and their competitive rates. Many investors can diversify their long-term portfolios by incorporating these types of bonds for a portion of their strategy. Investors might also want to consider zero coupon bonds, mainly in retirement accounts as a way of not only diversifying, but knowing what they will have and when they will have it. Zero coupon bonds are bought at a discount from their face value. Bonds have a face value of $1,000 and a zero coupon bond may sell for $750 now for example and be worth $1,000 at maturity. The difference is the rate that the investor earns. Lastly, other fixed rate investments like CDs and fixed annuities offer lower risk and portfolio diversity.

Other considerations for times like these
We continue to think that part of a diversified portfolio should include increased weightings into health care, energy, consumer staples, utilities and financial sector stocks. Increased allocations into fixed income, or bonds could be part of a well-diversified portfolio. Lastly, we think investors should continue to watch the value of the dollar, as its continued slide would mean accelerated growth in international investments (which of course brings on more risk).

Last tidbits
We read that for the first time in decades, China’s population has declined (by more than 850,000 people). We also read that in 2022, for the first time in a long time, many index funds underperformed the market. That might be so because index funds are weighted by market capitalization. With approximately 27 percent of the S&P 500 into the technology sector, and that sector had significant drawdown in 2022, that might explain it. Should China continue to decline in population, that has worldwide implications for demands as well as for pricing and inflation. Lastly, if interest rates slow or reverse, investors tend to take more risk in this sector.

Now that we are well into the new year, investors are encouraged to perform portfolio reviews with their advisers or on their own. Working with an advisor might deliver “alpha,” that is, increased value for cost paid. Investors should also familiarize themselves with the latest changes in the tax code as well as the updates for retirement savings vehicles. Call or write your adviser or do your own research when you can.

There are special risks associated with investing with bonds, such as interest rate risk, market risk, call risk, prepayment risk, credit risk, reinvestment risk and unique tax consequences. Investments in municipal securities may not be appropriate for all investors, particularly those who do not stand to benefit from the tax status of the investment. Municipal bond interest is not subject to federal income tax but may be subject to AMT, state or local taxes. U.S. government bonds and Treasuries are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. CDs are insured by the FDIC and offer a fixed rate of return, whereas the return and principal value of investment securities fluctuate with changes in market conditions. An investment in a money market fund is neither insured nor guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. A fixed annuity is a long-term, tax-deferred insurance contract designed for retirement. Fixed annuities have limitations. If you decide to take your money out early, you may face fees called surrender charges. Plus, if you’re not yet 59-and-a-half, you may also have to pay an additional 10 percent tax penalty on top of ordinary income taxes. You should also know that a fixed annuity contains guarantees and protections that are subject to the issuing insurance company’s ability to pay for them. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Inclusion of this index is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Investing involves risk and you may incur a profit or loss, regardless of strategy selected. Diversification and asset allocation does not ensure a profit or protect against a loss. Holding investments for the long term does not ensure a profitable outcome.

Maurice Stouse is a Financial Advisor and the branch manager of The First Wealth Management/ Raymond James. Main office located at The First Bank, 2000 98 Palms Blvd, Destin, FL 32451. Phone 850.654.8124. Raymond James advisors do not offer tax advice. Please see your tax professionals. Email: Maurice.stouse@raymondjames.com.

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC, and are not insured by bank insurance, the FDIC or any other government agency, are not deposits or obligations of the bank, are not guaranteed by the bank, and are subject to risks, including the possible loss of principal. Investment Advisory Services are offered through Raymond James Financial Services Advisors, Inc. First Florida Wealth Group and First Florida Bank are not registered broker/dealers and are independent of Raymond James Financial Services.

Views expressed are the current opinion of the author and are subject to change without notice. Information provided is general in nature and is not a complete statement of all information necessary for making an investment decision and is not a recommendation or a solicitation to buy or sell any security. Past performance is not indicative of future results.

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