Second Quarter 2023 Market Commentary

July 20, 2023

“May You Live in Interesting Times”

 

This is a phrase that has been quoted for generations and appears to be a wish for a life of thought-provoking and distinctive experiences. However, it is typically used during times of uncertainty and disorder as opposed to peace and tranquility. We imagine that each generation has felt that it uniquely applies to them, and we are no different. To better frame our current “interesting” financial environment, we begin with the past.

We envision the perspectives and emotions of those who lived through historic periods such as our Revolutionary, Civil & World Wars, economic depression, social strife, and couple it with our most recent experiences such as the 2008 near collapse of our financial system, social upheaval, and a worldwide pandemic. But we must also appreciate the accomplishments when placed on the timeline of history. While acknowledging that much work remains, we do enjoy a level of economic prosperity unmatched in history. There is an abundance of food and agriculture never seen in history and medical advances that are nothing short of miraculous. For our part in the lives of our clients, we are grateful for the skills and modern resources we possess to function as stewards of your hard-earned assets.

H.P. Lovecraft, a twentieth century American writer said, “The oldest and strongest emotion of mankind is fear, and the oldest and strongest kind of fear is fear of the unknown.”  While it may appear that in today’s world of mass communication, the fear of the unknown should be offset by our massive access to information. However, there is a distinction between information and wisdom.

With the continuing loss of our “Greatest Generation” who served during the “interesting times” of World War Two, we are left with the glamorized movies and literature of the battle of good and evil. The simplicity of good versus evil provided for a unity of purpose rarely experienced since. We contrast the clarity of a nation with a singular purpose to triumph over a clear evil, narrowly viewed with the media resources of the era to our current massive saturation of competing information manipulated by algorithms. Regardless of viewpoint, the mental strain and taxation in these current interesting times is unlike any in history. This includes the daily flood of financial news and information that can easily cloud our emotions and shake our confidence in long-term goals.

This brings us to our current interesting times in the financial markets and more specifically, your financial goals. The subjects mentioned above, the uniqueness of our individual perceptions, the societal perceptions of challenges and accomplishments, the fear of the unknown, how we receive and process information and the clarity we seek in this crowded information age all contribute to the confusion with which financial information is viewed. Market commentators routinely throw around concepts such as fear and greed and how instrumental they are in the behavior of individuals and the markets.

Benjamin Graham, published his timeless book “The Intelligent Investor” in 1949, and said that investing entails “a trait more of the character than the brain.” Warren Buffett, a devotee of Graham, once said that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.”  Through 2023, news of Artificial Intelligence or AI has created a rush to a handful of stocks that have driven the markets forward. We believe in the power of AI going forward but we have remained more conservative in our overall view of the markets and economic conditions as we see our first duty as protective of the long-term health of our portfolios.

A Fragile Market:

The markets remain fragile and as investors we are leery of “chasing the market” as just ten U.S. large-cap companies have accounted for approximately ninety percent of stock market returns in 2023. This is not a healthy indicator for the broader stock market going forward.

The Federal Reserve has clearly stated a cautious outlook about inflation continuing to climb and they are sending a clear message conveying a hawkish outlook. We expect another rate hike following their July 25 th and 26th meeting. The purpose of raising rates is to slow economic activity which in turn reduces demand in an effort to bring inflationary pricing down.

The American consumer accounts for almost seventy percent of our Gross Domestic Product (GDP). Discretionary household income levels are down, borrowing in all areas has been dramatically dampened by high interest rates which in turn is causing stagnation in the housing market, which is a huge driver for economic activity. Credit card balances are rising as are credit card interest rates. Wages have grown but are not keeping pace with the rate of inflation.

The shadow of an economic slowdown, a recession, is a major concern. There is significant confusion in establishing consensus among market analysts and economist forecasts regarding whether a recession is coming and if so its length or severity.

While the definition of recession can vary among economists and politicians, a popular definition is when gross domestic product (GDP) has declined for at least two consecutive quarters. This occurred in 2022.

The classic sign of a pending recession is an inverted yield curve. It has been a year since the yield curve for Treasurys inverted, meaning short-term bonds are paying higher interest rates than long-term bonds. The disparity between most short and long bonds is the largest since 1981. At Affinity Capital, we have been purchasing U.S. Treasury Bills with a two-week maturity and receiving an extremely minimal risk, annualized return of over five percent, while a 30-year Treasury Bond barely reaches four percent.

Historically, an inverted yield curve has not always resulted in a recession … but … when a recession has occurred, it has always been preceded by an inverted yield curve. Since 1978, the yield curve has inverted six times and has preceded a recession each time.

Stagflation:

Inflation and recession ride a seesaw. This is where stagflation comes into play, a combination of high inflation and slowing economic activity. Last seen in the 1970’s, it is not a desirable path to navigate. Diversification into securities such as Treasury Inflation Protected Bonds and corporate bonds that are hedged against inflation are paying generous income while protecting your portfolios.

We exited our positions in small and mid-size companies last year at opportune times and are currently evaluating their attractiveness to add to our portfolios going forward. As mentioned previously, we believe the power of Artificial Intelligence is very real and are currently evaluating potentially attractive positions to enter.

We welcome your feedback and are always available to visit. Thank you for the opportunity to serve you and your family and to collaborate with you for—Wealth Management for Life!

Market Update: Inflation, AI, and the Road Ahead

June 25, 2026
Markets continue to navigate a mix of encouraging economic news and ongoing global uncertainty. While investors remain optimistic about the long-term outlook for the economy and corporate earnings, headlines from around the world continue to influence day-to-day trading. One of the biggest factors remains geopolitics. Although tensions in the Middle East have eased somewhat, investors are still watching developments closely because they can affect oil prices, inflation, and ultimately interest rates. Lower oil prices this week have helped calm some inflation concerns, which has been a positive for the broader market. Technology also remains in the spotlight. Strong earnings and continued investment in artificial intelligence have supported parts of the market, although investors are becoming more selective as valuations in some technology companies remain elevated. Looking ahead, markets will continue to focus on inflation data and the Federal Reserve's next steps. If inflation continues to moderate, it could provide support for stocks. However, unexpected developments overseas, changes in energy prices, or shifts in economic data could still create short-term volatility. While short-term market movements can be unsettling, they are a normal part of investing. Rather than reacting to daily headlines, we remain focused on building portfolios designed to weather changing market conditions and help you pursue your long-term financial objectives. Maintaining a disciplined, diversified investment strategy remains one of the most effective ways to navigate uncertainty. As always, if your financial situation or goals have changed, we're here to help ensure your plan continues to align with what matters most to you.

What We're Watching This June — Market Thoughts for You

June 1, 2026
As we turn the page to June, markets find themselves at a familiar crossroads: optimism tempered by uncertainty, momentum tested by macro headwinds. May closed on a constructive note, with equities finishing the month at or near all-time highs — a remarkable recovery from the turbulence that defined the early part of the year. The dominant theme of 2026 has been resilience in the face of disruption. From the tariff volatility of the first quarter to geopolitical shocks in the Middle East, investors have repeatedly demonstrated a willingness to look through near-term noise toward the fundamentals. That posture has been rewarded. The S&P 500 has returned over 10% year-to-date, driven in large part by an exceptional earnings season — first-quarter blended growth came in above 28%, the strongest pace in several years — and continued enthusiasm around artificial intelligence investment. Yet the risk landscape heading into summer is far from benign. The conflict in the Middle East remains the single most important variable in the macro calculus. Energy markets have been severely disrupted, with Brent crude up sharply on the year despite recent relief as hopes for a resolution in the Strait of Hormuz gained traction. Oil prices are not merely an energy story — they are a consumer story, an inflation story, and ultimately an interest rate story. A durable peace agreement could be a meaningful tailwind; a breakdown in talks, the opposite. The bond market deserves particular attention. One of the defining features of this cycle has been the breakdown of the traditional stock-bond diversification relationship. Since the onset of the Middle East conflict, long-duration Treasuries have failed to provide the ballast they historically offered during periods of equity stress. Sticky inflation, persistent fiscal deficits, and energy-driven price pressures have conspired to keep yields elevated. Investors relying on a classic 60/40 framework may find that the playbook requires updating looking into high quality corporates. On the monetary policy front, the transition at the Federal Reserve — from Chair Powell to Kevin Warsh — has so far been absorbed calmly, with equity and bond volatility both declining in recent sessions. The Fed's path remains data-dependent, and this week's jobs report will be closely watched. Consensus expects the unemployment rate to hold near 4.3%, consistent with a "low hire, low fire" labor market. More interesting may be the wage data: softening wage growth could constrain consumer spending at a moment when the personal savings rate is already under pressure. Globally, the picture is more nuanced than a simple risk-on or risk-off framing suggests. European equities outperformed in May, while the ECB is now actively signaling the possibility of rate hikes in June — a stark contrast to the easing cycle many had anticipated a year ago. Emerging markets have staged a meaningful recovery, supported by AI infrastructure spending and a softer U.S. dollar. The macro divergences between regions are as wide as they have been in years, and that creates both risk and opportunity depending on how portfolios are positioned. Seasonality is worth noting as well. June has historically been a challenging month for equities in midterm election years, and after a sharp rally off the March lows, some degree of consolidation would not be surprising. Markets rarely move in straight lines, and the conditions for short-term choppiness — elevated geopolitical risk, a pivotal central bank meeting in Europe, key economic data releases, and a VIX that has returned to complacency — are present. The bottom line: the fundamental backdrop remains broadly supportive, earnings momentum is intact, and long-term investors have been well-served by staying disciplined. But the risks are real and the range of outcomes is wide. In an environment where traditional hedges are less reliable and geopolitics can move markets overnight, diversification, quality, and a clear-eyed view of one's own time horizon matter more than ever. As always, we are here to discuss how these dynamics relate to your specific situation. Please do not hesitate to reach out.

The Order of Returns

April 29, 2026
The first four months of 2026 have been a useful reminder that markets do not move in straight lines. After entering the year at record highs, U.S. equities pulled back sharply on geopolitical tensions tied to the Iran conflict, with the S&P 500 coming close to a ten percent decline before recovering much of that ground. Volatility has returned again on rising energy prices and a softer tone from the technology sector that has carried so much of this cycle’s leadership. Oil sits near one hundred dollars per barrel, the ten-year Treasury yield hovers near four and a half percent, and traditional diversification between stocks and bonds has been less reliable than many investors have come to expect. None of this changes our long-term view. It does sharpen a conversation we believe every household within ten years of retirement, on either side of that line, should be having right now. THE QUESTION THAT MATTERS MOST After more than thirty years of advising families through every kind of market, I have come to believe that one question matters more than almost any other in retirement planning. It is not what your average return will be. It is not even how much you have saved. The question is this: in what order will those returns arrive, and what will the portfolio be doing when they do? Two households can finish their working years with identical balances and identical long-term average returns. One can run out of money. One can remain wealthy for life. The only difference between them is the order in which good and bad years happened to fall. WHY ORDER MATTERS MORE THAN AVERAGE When a portfolio is accumulating, a market drop is something close to a gift. Contributions buy more shares at lower prices. When a portfolio is distributing, the same drop is a wound. Every dollar withdrawn during a downturn cannot participate in the recovery, and the base from which all future growth compounds is permanently smaller. Retirees who began withdrawals in 1973, in 2000, or in 2008 lived through outcomes quite different from those who retired even two or three years earlier or later. Same averages over the long arc. Very different lives for the family. THE RETIREMENT RED ZONE Retirement planning does not begin the year you stop working. It begins five to ten years before. We sometimes call that window the retirement red zone, and it is the period in which the wrong portfolio, held too long, can do real and lasting damage. A portfolio that served someone beautifully through their fifties is rarely the right portfolio for the first decade of withdrawals. Waiting until the retirement date itself to reposition is not a plan. It is a hope. HOW WE REPOSITION PORTFOLIOS Repositioning is a multi-year process, not a single trade. We model honest cash-flow needs in dollars. We construct one to three years of withdrawals in stable, liquid reserves so no client is ever forced to sell equities into a falling market. We build an intermediate layer of high-quality bonds to refill those reserves over time. We sequence withdrawals across taxable, traditional, and Roth accounts to manage lifetime tax cost, often using the years before Social Security and required minimum distributions for thoughtful Roth conversions. We rightsized concentrated and legacy positions over multiple tax years. And we stress test the plan against a meaningful market drop in year one before any client crosses the retirement line. A CLOSING THOUGHT Sequence risk is not really a math problem. It is a human one. The discipline to reposition during good markets, when it can feel almost unnecessary, is what separates retirees who sleep well from those who reach for the wrong decision at the worst possible moment. By the time a dramatic market drop arrives, the work either has been done or it has not. Whether you are a long-time client of Affinity Capital or considering a relationship with our firm, we would welcome a conversation about how your portfolio is positioned for the years ahead.