Broker Check

Summer 2023<br/><sup><br/>Volume 31 | No. 3</sup>

Summer 2023

Volume 31 | No. 3

Market QuickTakes Q2 | 2023

  • For the third straight quarter, stocks posted strong gains across the board in Q2 and finished Mid-Year on a solid note
  • Nasdaq and the S&P 500, fueled by mega-cap growth stocks, led all indexes gaining 12.8% and 8.3% in Q2, ending Mid-Year up 31.7% and 15.9%, respectively
  • Market breadth widened encouragingly in June as mid-caps and small-caps led, as measured by the S&P 400 and Russell 2000, posting gains of 9% and 8%, respectively, to finish Mid-Year with solid gains of 7.9% and 7.2%
  • Overseas, developed market stocks also posted solid results in Q2, with the MSCI EAFE index gaining 5.9%; despite a strong June, Emerging Markets dipped 0.1% in Q2 but closed Mid-Year in positive territory up 3.5%
  • Q2 had its share of volatility in May with the debt ceiling crisis and the Fed raising interest rates another 0.25%; it was the tenth straight Fed rate hike totaling 5.0% since last March, in its continued battle to lower inflation; the Fed did pause at its June meeting but strongly suggested one or two more hikes may be needed by year-end
  • As interest rates rose in Q2, with continued strong employment data, the Bloomberg US Aggregate Bond Index dipped 0.9%; the benchmark 10-year Treasury Note yield rose 0.33% to 3.81%

Past Performance is No Guarantee for Future Success 

2023 Retirement Contribution Limits

Market Review

For the third straight quarter, stocks rose in Q2
ending Mid-Year with strong gains

With wide ranging market gains in June, stocks rose for the third straight quarter, and we have reached halftime for 2023 posting strong results. The Second Quarter remained largely a reversal of 2022 and saw large-cap growth stocks again dominate large-cap value. The tech-heavy Nasdaq led the market posting a 12.8% Q2 gain and ended Mid-Year up a blistering 31.7%, with the top seven mega-cap tech stocks driving most of the returns. It was the best first half for Nasdaq since 1983. The benchmark S&P 500 jumped 8.3% in the Second Quarter and closed up 15.9% for the year.

Mid- and small-cap stocks led the market higher in June, an encouraging sign of broadening market breadth. The mid-cap S&P 400 surged 9% in June, while the small-cap Russell 2000 jumped 8%, closing out Mid-Year up 7.9% and 7.2%, respectively.

Overseas, developed markets saw more muted gains in Q2, with the benchmark MSCI EAFE index gaining 1.9%, but have remained strong overall ending Mid-Year up 9.7%. Inflation in developed markets like the EU and the UK have seen declines as well, with their central banks also raising interest rates dramatically, but have remained well above US inflation. Emerging markets dipped 0.1% in Q2 but finished up 3.5% for the year after a June rally of 3.2%

The Second Quarter was not without volatility as the market dealt with the debt ceiling crisis in May, which threatened a more severe economic recession and saw the market pull back. But the debt ceiling crisis was resolved on a bipartisan basis, averted disaster, and set the stage for the June rally. The Fed also raised interest rates another 0.25% at its May FOMC meeting as expected. It was the 10th Fed interest rate hike since last March totaling 5.0% in its ongoing aggressive fight to bring inflation down. That ongoing battle has been successful, as headline CPI inflation has dropped over 55% from its 9.1% peak last June to 4.0% in May (the June CPI just released July 12 fell more than expected to 3.0% year-over-year). Core CPI, less food and energy, has fallen as well but has been stickier due to strong job and wage gains, along with persistently high housing costs. While the Fed paused at its June FOMC meeting, strong language emphasized there is more work to do, and one to two more rate hikes may be needed by year-end. Markets and NSI are expecting another 0.25% rate hike at the July FOMC meeting. Interest rates rose across the board in the Second Quarter, with the benchmark 10-year T-Note Yield rising 0.33% to 3.81%. The Bloomberg Aggregate Bond index fell 0.9% in Q2 but remained in positive territory for the year at 2.1%. The Bloomberg Aggregate Bond index was down 13% in 2022.

The Outlook

Given a slew of challenging news headlines, including four US bank failures in Q1 that required the FDIC, Treasury, and the Fed stepping in, as well as persistent recession fears and three Fed rate hikes, it is impressive that the market has been resilient and posted strong Mid-Year gains. Further, all major US and foreign benchmarks are up double-digits over the trailing 12 months, again led by Nasdaq and the S&P 500 up 25% and 17.6%, respectively.

Given the Fed’s aggressive tact of raising rates to fight inflation noted above, it has been trying to engineer a soft-landing for the economy while trying to hit its 2% inflation target. Yet, with the strong jobs market and unemployment still near 50-year lows at 3.6%, the economy, though slowing, remains resilient. A soft-landing / mild recession continues to be the baseline forecast. With the Fed projecting one to two more rate hikes by the end of the year, further economic slowing is expected; however, the risk of a severe recession remains low. Among the G7 countries (Group of Seven most economically advanced countries), the US has had the strongest post-COVID economic recovery and the largest decline in inflation, as measured by harmonized Core CPI, according to the US Treasury and Haver Analytics. 

Our Outlook for the Second Half remains cautiously optimistic, especially given the broadening of the market breadth seen in June. Small- and mid-cap stocks along with value stocks have some more catching up to do to sustain the broad market rally. With the strong finish to June and Mid-Year, stocks in general are at or near YTD and 12-month highs. We have made great progress but are still in the recovery process from 2022's bear market. As we have seen, economic data and other variables can change at any time, which can impact market sentiment. Continued progress on inflation and the Fed ultimately ending its rate hike cycle will be key. A consolidation or pullback in the market would not be a surprise, though not assured, at some point during the summer and would arguably be healthy for the market heading into fall and year-end. Therefore, volatility remains in the forecast.

We continue to urge investors to remain resilient with their investment portfolios and maintain a disciplined, long-term focus.

  • Remain well-diversified
  • Maintain discipline and patience
  • Focus on the long-term
  • Review your Risk Tolerance

Call your Nelson Advisor today at 800-345-7593 to discuss any concerns and review your portfolio.   

~Your Nelson Securities Team    

*Past Performance is No Guarantee for Future Results

A Whole New World? 

If it ain’t broke, don’t fix it, right?

Since US stocks were crushing it for more than a decade, it seemed pointless to look anywhere else for return. But some of the advantages for US stocks may have shifted course, making now a good time to consider a more diversified approach going forward.

For years, interest rates and inflation were low, which favored growth stocks. Strong demand for smarter devices and online services also helped drive impressive outperformance for the tech-heavy US stock market—and for much longer than usual.

Then 2022 happened. Inflation hit multi-decade highs, and the Federal Reserve (Fed) raised US interest rates aggressively in response. This led to a rough year for markets, but it may have also hit the reset button on the investing world as we’ve known it. For the first time in many years, value stocks outperformed growth stocks, and international stocks outperformed US stocks.

International markets have a noticeably different composition than the US, with greater exposure to cyclically oriented sectors. The international market, as represented by the MSCI ACWI ex USA Index, favors value-oriented cyclical sectors such as financials, materials, industrials, and energy, which historically have been able to help offset inflation. If higher inflation and interest rates are the “new normal” going forward, this value tilt could put international markets in a beneficial spot.

~ Hartford Funds

Download the Hartford Funds' full pieceA Whole New World? Why International Stocks May Finally Shine

Talk to your Nelson Securities Advisor to review your Portfolio and International Allocation: 800-345-7593

US and International Stocks Have Traded Periods of Outperformance
US Equity vs. International Equity 5-Year Monthly Rolling Returns (%)

As of 12/31/22.

The chart above shows the S&P 500 Index’s returns minus the MSCI World ex USA Index’s returns. When the line is above 0, domestic stocks outperformed international stocks. When the line is below 0, international stocks outperformed domestic stocks. The performance shown above is index performance and is not representative of any Hartford Fund’s performance.

For illustrative purposes only. Indices are unmanaged and not available for direct investment.

Data Sources: Morningstar, Bloomberg, and Hartford Funds, 1/23.

Past performance does not guarantee future results

The US Dollar Currency Index (DXY) measures the relative value of the US dollar against a basket of other foreign currencies. MSCI ACWI Index is a free float-adjusted market capitalization index that measures equity market performance in the global developed and emerging markets. MSCI ACWI ex USA Index is a free float-adjusted market-capitalization index that measures the performance of both developed and emerging stock markets, excluding the United States. MSCI World ex USA Index is a free float-adjusted market capitalization index that captures large- and mid-cap representation across developed markets countries excluding the United States. S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks. 

Important Risks: Investing involves risk, including the possible loss of principal.

• Foreign investments may be more volatile and less liquid than US investments and are subject to the risk of currency fluctuations and adverse political, economic, and regulatory developments. These risks may be greater, and include additional risks, for investments in emerging markets or if a fund focuses in a particular geographic region or country. • Different investment styles may go in and out of favor, which may cause a Fund to underperform the broader stock market.
• To the extent a Fund focuses on one or more sectors, the Fund may be subject to increased volatility and risk of loss if adverse developments occur.
•Diversification and asset allocation do not ensure a profit or guarantee against loss.

Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

Investor Patience is a Virtue

History Shows That Stock Gains
Can Add Up after Big Declines

Sudden market downturns can be unsettling. But historically, US equity returns following sharp downturns have, on average, been positive.

• A broad market index tracking data since 1926 in the US shows that stocks have tended to deliver positive returns over one-year, three-year, and five-year periods following steep declines.

• Cumulative returns show this to striking effect. Five years after market declines of 10%, 20%, and 30%, the cumulative returns all top 50%.

• Viewed in annualized terms across the longest, five-year period, returns after 10%, 20%, and 30% declines have been close to the historical annualized average over the entire period of 9.8%.1

Dimensional Fund Advisors
MKT-24449 08/22 1777845

For the Full DFA Insight Click Here

1. The average annualized returns for the five-year period after 10% declines were 9.54%; after 20% declines, 9.66%; and after 30% declines, 7.18%.
Past performance is no guarantee of future results. Short-term performance results should be considered in connection with longer-term performance results.
Market declines or downturns are defined as periods in which the cumulative return from a peak is –10%, –20%, or –30% or lower. Returns are calculated for the 1-, 3-, and 5-year look-ahead periods beginning the day after the respective downturn thresholds of –10%, –20%, or –30% are exceeded. The bar chart shows the average returns for the 1-, 3-, and 5-year periods following the 10%, 20%, and 30% thresholds. For the 10% threshold, there are 29 observations for 1-year look-ahead, 28 observations for 3-year look-ahead, and 27 observations for 5-year look-ahead. For the 20% threshold, there are 15 observations for 1-year look-ahead, 14 observations for 3-year look-ahead, and 13 observations for 5-year look-ahead. For the 30% threshold, there are 7 observations for 1-year look-ahead, 6 observations for 3-year look-ahead, and 6 observations for 5-year look-ahead. Peak is a new all-time high prior to a downturn. Data provided by Fama/French and available at Eugene Fama and Ken French are members of the Board of Directors of the general partner of, and provide consulting services to, Dimensional Fund Advisors LP.
Fama/French Total US Market Research Index: July 1926–present: Fama/French Total US Market Research Factor + One-Month US Treasury Bills. Source: Ken French Website.
The Fama/French Indices represent academic concepts that may be used in portfolio construction and are not available for direct investment or for use as a benchmark. Index returns are not representative of actual portfolios
and do not reflect costs and fees associated with an actual investment.
Results shown during periods prior to each index’s index inception date do not represent actual returns of the respective index. Other periods selected may have different results, including losses. Backtested index performance
is hypothetical and is provided for informational purposes only to indicate historical performance had the index been calculated over the relevant time periods. Backtested performance results assume the reinvestment of
dividends and capital gains.
Investing risks include loss of principal and fluctuating value. There is no guarantee an investment strategy will be successful.
Dimensional Fund Advisors LP is an investment advisor registered with the Securities and Exchange Commission.
Investment products: • Not FDIC Insured • Not Bank Guaranteed • May Lose Value
Dimensional Fund Advisors does not have any bank affiliates.

Financial Insights...

Choosing Beneficiaries for your Retirement Accounts

Life moves quickly and is unpredictable. Making sure your Beneficiary Designations are up to date is critical. This piece from MFS illustrates the importance of properly designating your beneficiaries.

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Time (in the market) is of the Essence

Time is (literally) money. Hartford Funds illustrate that "with the power of compounding, investing even a small initial principal can be far more beneficial
than investing a larger amount later." 

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When will we get back to average market returns?

Vanguard puts historical market returns into perspective with its "When will we get back to average market returns?" illustration. Past performance is no guarantee for future success is the standard disclaimer for investment returns and this piece shows how annual and long-term averages differ and vary.

Read Now

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July-23: Model Portfolio Allocations Updated for Q3-Q4 2023 

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Investor Note

Mutual Fund and Variable Annuity investment strategies, which include investing in specific sectors, foreign securities (both developed and developing markets), high yield securities, or small and medium sized securities may increase the risk and volatility of the funds/sub-accounts. Changes in interest rates may affect the performance of fixed income (bond) funds; if rates increase, bond values decrease and vice versa. Investors should consider the investment objectives, risks, and charges and expenses of the Mutual Fund and/or Variable Annuity carefully before investing.

The Mutual Fund prospectus (and summary prospectus, if available) and Variable Annuity prospectus contains this and other information. Please read carefully before investing. A Mutual Fund prospectus and Variable Annuity prospectus and contract can be obtained by calling your Nelson Rep at 800-345-7593 or the Mutual Fund and/or Annuity company directly.

Publisher: Nelson Securities, Inc.

The WEALTH ASSET ADVISOR is published quarterly by Nelson Securities, Inc., a Registered Investment Advisor. All rights reserved. It is a violation of U.S. copyright laws to duplicate or reproduce any article or portion of this publication without the written permission of the publisher.

Information and historical market data contained within this newsletter are taken from sources we believe to be reliable but, we can not guarantee its accuracy. Nelson Securities, Inc., or the publisher, will not be held responsible for actions taken based wholly or partially on information contained herein. Recommendations are of a time-sensitive nature and not a substitute for a comprehensive plan for investing. Each investor must consider suitability with regard to risk prior to investing.