Thread the Needle - February 2023 Newsletter
Thread the Needle
We devote a portion of this newsletter to the next evolution in Cadence Financial Group's investment offering, but first, we need to talk a little markets.
Hope springs eternal; what a difference a new year can make. After a dismal 2022, markets are off to a fast start.
We discuss many of the challenges the markets faced in 2022 and why we're more optimistic about this year in our 2023 outlook webinar (click here passcode: =VcS$Y6u). January's market performance helped to underline our more constructive outlook, and we highlight three charts that support our optimism.
We have often referred to market "breadth" in past webinars and why it's essential to follow. Market breadth measures the number of stocks participating or not participating in a market advance or decline. Broad participation is good, but narrow participation is generally not.
There are a few ways to measure breadth, but below we show the equal-weighted S&P 500 index (black line) versus the market-weighted index (red line). As one can see, the equal-weighted index bottomed one month earlier than the S&P 500 and has been outperforming ever since.
The bottom line is that the market rally this year is very different than the one we experienced in the summer of 2022.
S&P 500 Equal-weighted Index Leading The Way
At the end of last year, pessimism was high, particularly after a difficult December. There was no shortage of strategists calling for a strong back half of 2023; however, cycle history suggests markets will be strong in the first half of this year.
Ned Davis Research 2023 Cycle Composite illustrates that the S&P 500 appears to be following the historical pattern – trend is more important than the level in these types of examples. If history repeats itself, investors may continue to push the market higher until they take off for their summer vacations.
Cycle Composite Points to Strong First Half
So the natural question is, what has dramatically changed to justify a solid start to the year?
As noted, investors were overly pessimistic heading into 2023, and positioning reflected their dim outlook. On the macro front, inflation (as we have been expecting) is easing, giving investors greater confidence that interest rates are approaching their terminal value.
The quarterly earnings season has been less bad than expected. We have noted that the market had already priced in a mild recession, so if that can be avoided, markets will breathe a sigh of relief. Right now, the markets are taking a big Aaaah.
Seventy Percent of S&P 500 Companies Topping Analysts' Expectations
Introduction Cadence Investment Pool
We're excited to announce the next evolution in Cadence Financial Group's investment solution. In the coming weeks, we will launch our first equity pool.
The Cadence Select Equity pool follows the same investment process we have used to manage client portfolios but will allow clients to benefit from the scale that occurs when combining assets, similar to a mutual fund.
By participating in the pool, clients will reap the benefits of value-added pricing on foreign exchange, enhanced income opportunities and simplified tax reporting with one slip.
We will hold a webinar on Thursday, February 23rd at 1:15pm PST to discuss the launch; please register here. In the meantime, we highlight the main advantages below and will provide a complete FAQ before the webinar.
If you're ready to move forward and would like to take advantage of the pool, please click here to get started.
Investment Pool & Benefits
What is an investment pool?
Investment pools are like mutual funds. They allow an investor to pool assets to acquire financial assets and benefit from economies of scale.
The Cadence Select Equity investment pool will hold the identical securities we have purchased for clients in their Separately Managed Account (SMA) at Raymond James.
Improved efficiencies. Tired of searching for all those tax slips in April? With pools, there is one tax slip, so you're not pulling your hair out at tax time.
Currency. The scale gained from pools will allow for value-added pricing on foreign exchange transactions, which means you benefit from the reduced costs. We will also be able to hold multiple currencies rather than always converting back to Canadian dollars, saving on unneeded or excessive foreign conversion exchanges.
More Income. Again, the scale gained from pools will allow us additional income opportunities through simple conservative derivative strategies. We anticipate that additional income opportunities will enhance returns.
Reduced Risk. Simple, conservative derivative strategies can mitigate some market risks.
Distributions. Companies pay dividends monthly, quarterly or sometimes infrequent special distributions. By investing in pools, we can more efficiently set up a regular distribution tailored to your cash management needs.
Small accounts. Some investments are difficult and/or impractical to hold in small accounts such as TFSAs, given the share value of some companies. For example, adding shares of BlackRock (share price of ~$700) may be impracticable in small accounts as they may not be able to purchase one full share.
Charts of Interest
Mission accomplished! US Fed funds rate in restrictive territory.
A recession in 2023 is unlikely unless you're in the UK. UK GDP growth projection relative to the rest of G7.
Cars with the longest potential lifespan.