Investment Outlook Q2 2023: Are Things As Bad as They Seem?

In our outlook video we cover our views on markets as we head into the 2nd quarter of 2023. We discuss inflation, the banking turmoil and interest rates; as well as what the economic back drop means for investment assets like stocks and bonds. Watch the video version with the charts below or listen to the podcast version in the Capital Stewards podcast channel!

Transcript:

 Hi everyone and welcome to our outlook for the second quarter of 2023. Titled Are Things As Bad As They Really Seen? My name is Brian c I'm the founding partner of Capital Stewards. We are professional investors, who help professionals from other fields make smart long-term investing and financial planning decisions.

Today I'm gonna share our views on the economy, inflation, what's going on in the banking sector. We'll talk a little bit about the first quarter, what has happened here today, and then more importantly how we, see things shaping up as we head into the second. I think if most of you asked your peers about markets and the economy, sentiment would be pretty bad.

Layoffs seem to be increasing. McDonald's was in the news this week doing more layoffs. Inflation's still really high. There have been lots of talk about recession, whether we're in one, whether we're going to be in one, and markets have obviously, obviously been really volatile. We had a mini banking crisis in March so certainly the first quarter of 2020.

Would've produced negative returns against all of those sort of bat talking points, right? Except that exactly the opposite happened. The s and p 500 returned 7.5% in the first quarter bonds. The Barclays aggregate bond index was up almost 3%. And then you see gold in the blue line on the chart a little bit over 9% mostly due to the strong rally that that happened during the, during the banking crisis.

So I, I, I put this out there to start to. Reaffirm the idea that it's really important to have good long-term investment strategy. Ill time to moves during the quarter, could have produced really poor investment results. That's why it's really, really important to find a strategy that you can stick with over the long term.

If you're not comfortable with your investment strategy and sticking with it over the long term, then it's time to reevaluate the whole thing and find something that you can stick with. So in this outlook, as usual, we're gonna start with long-term perspective as. We'll talk about interest rates and inflation.

We'll talk about our views on the economy where it's going. We'll talk about the banking system stocks, bonds, all those things. So we got a lot to cover in a little bit of time to do it. So let's dive in.

As always, we're long-term investors, so we start by looking at long-term returns. The, you can see if you can see the chart.

You see that this is over really the last almost 25 years. We don't wanna get caught up in, in short term thinking. And so that's why we look at these long term 25 year 10-year charts that coming up in just a minute. When we look over the long term, the s and p 500 is still earning just over 9% on average over the last 25 or so years.

I think during downturns it's especially important to look back at prior challenging times, whether that's the tech bubble crash after the 1990s, the great financial crisis, or even the covid pandemic. And look at where asset prices are today versus where they were back then. So anytime we start to get scared or we start to get worried about where markets are gonna go I think it's helpful to look back and if you see, even if you just go back to the Covid Pandemic, if you had invested in February right before the news of Covid came out, you still would be a really happy investor today had you stayed the course.

The same thing is true for the great financial crisis. So when we look back over the last 25 years, stocks obviously have had the best returns, right? Averaging a little bit over 9% a year gold. Has done pretty well as well. And then you see the Barclays Aggregate bond index four and 4.3% a year.

And then inflation at about two and a half percent. We zoom in just slightly over the last decade. You see still you've experienced really strong stock market returns. The s and p 500 is averaging of 12.2% a year. The stock markets are, are above their pre covid peaks the Barclays aggregate aggregate bond index.

So bonds have not done quite as well. A lot of that underperformance really came in the last year as, as interest rates rose. So underperforming inflation. And then you see real estate did really with second to stocks, right? Averaging. 5.9% over, over the last decade. And, and that's before you lever it.

So a lot of folks that invest in real estate obviously are doing that with some form of debt. And so the returns there can be even higher. And then gold notably only up 2.2%. So gold has its moments, but over the long term over the last decade hasn't even kept open inflation. So, goes back to kind of reaffirm this view that we've talked about a lot, that stocks really are the best way to hedge inflation the best long-term investment.

And then we look at bonds and other types of assets as a way to hedge the volatility that comes in the equity markets. So let's talk a little bit about inflation. Obviously that's still top of mind for everyone. And inflation, though it's still high, is declining from peak levels that we saw last year.

All of the monthly data that you see in the news is volatile. So it's not gonna be a straight line down, just like it was in a straight line up. But we continue to see lower levels of inflation or disinflation. In goods prices. And, and when we think of goods, we're talking about computers and clothing and cars and things like that, right?

Hard physical things. We also see commodity prices like oil coming down and housing prices and rents are declining as well. And housing and rent prices we know are a lot lower. There are indices that track that stuff more in real time. You can go on Zillow, some of those kinds of places and look and see that stuff in real time, but it's not reflected yet in c p.

So we know that the C P I is gonna. To go down as it fully reflects some of those prices as services are the real challenge. And that's what continues to be really sticky. And so if you're looking at the chart, you'll see that inflation the headline inflation just over 6%, still core inflation, 5.5%. And what's gonna make it difficult to move that core inflation number down is services. It's gonna take many, many more months for that to normalize. And that's because the labor market is still really tight and it's not just gonna magically loosen up. We'll talk more about that in a minute.

But labor is the key driver for services prices, and so that's why services inflation still remains. What's important to understand though is even if services inflation stays exactly where it is we still think c p I can get down to three and a half or four, four and a half percent by the end of the year.

So we can still see c p I decline pretty meaningly meaningfully from here. Even if services inflation stays exactly where it is because of the trends that we see in goods, commodities and real estate, et cetera. So I expect inflation to be a bumpy, slow ride down, but I expected it. It's moving lower the rest of this year and then into 2024.

So let's talk a little bit about that labor market. The labor market remains really strong. If you see at the chart, there's, there's just over 10 million open jobs. The jolt survey actually came out earlier today before we recorded this. So now it's just under 10 million, but there's still a lot of open jobs in the economy and there's just over 5 million available workers.

And so there's a pretty big gap between the number of open jobs and the workers that are available to fill them. And when we look at. US employment to population ratio, which is just a broad measure. The percentage of people in the US that are working, we see that that's kind of stuck at 60% and it's a little bit below the, the pre covid peak, but it's not substantially below there, maybe a percent or a percent and a half to get all the way back to that peak.

And it's kind of flatlined that employment population growth is, has not moved up meaningfully really in the last nine months. And so the idea that there's sort of a bunch of couch potatoes out there that are still sitting at. They're gonna magically come back into the labor force at some point.

We just don't think that that's going to happen. And so the, the way that we're gonna see that services inflation fall and get more alignment between the number of open jobs and the number of available people that wanna work is by a reduction in the number of jobs, or we talked about this coming into 2023, perhaps through increased immigra.

Legal immigration. So park all the stuff to the side about the border and what's going on there. Think about just more, we need more legal workers to fill jobs in the country. So either more, either need more workers or we need a number of available jobs to come down. And that's that by the way is a feature.

It's not a bug. Of the Fed raising rates. That's what they're trying to do by increasing rates and. We've seen the Fed obviously takes pretty substantial action with interest rates. Over the past year, interest rates have risen from basically zero to now.

The effective Fed funds rates 4.83 percent still a little bit below the consumer price index, but at the beginning of the year, core C P I was still running 3% above the Fed. And now you can see that that gap is, is now down to less than 1% with, with C p i 5.5% and the effective funds rated at 4.83%.

So we've been talking for a long time about how when we look back historically, and you can see this in the chart, in order for the Fed to eliminate high peaks and inflation and spikes of inflation, we have to get that Fed funds rate above. Support inflation. And , we are getting close to that level and, you know, say the Fed hikes another 25 or 50 basis points this spring inflation, we expect the continue to move lower.

And so that would, that would get us to a place where the Fed funds rate either is equivalent to the, core consumer price index or indeed the C P I moves below the Fed fund rate. And it's important when we talk about Paus. To understand the, the conceptually around that as inflation continues to go lower, even if the fed just stays put, that actually puts increasing amounts of pressure on the economy as there's a, a bigger gap between what is low, lower levels of inflation then and higher interest rates.

And so the fed pause doesn't necessarily mean that they're not having increasingly more restrictive economic policy and continue to slow the economy down. So that's why I don't think it's appropriate for them to continue to hike another percent or two. But they're probably not quite done yet.

Getting getting those two things in alignment, I think it makes sense for them to hike until we see the, the Fed funds rate cross the core c p I level. So are we in a recession? Obviously the Fed has been increasing interest rates. We're trying to slow down the economy. Are we in a recession?

Is one coming? We talked about in our outlook for 2023 that, we expected the economy to slow down. And that has happened, and we'll talk more about that in a minute. But trying to predict whether or not we're actually going to have a recession is a really challenging thing to do. Growth is slowing, but the jury's still out on whether we're gonna have an official recession in 2023 or not.

But the high, the higher rates of G D P that we saw in 2020. Slowed down in the fourth quarter and appears that they're gonna slow down again in the first quarter of 2023. And the, the Atlanta Federal Reserve has sort of a G D P now estimate. That's a pretty good indicator of, of what GDP P'S gonna be.

And that says that Q1 G D P is down, down to 1.7%. So we're not in a recession, but growth is definitely slowing down. The challenge with tipping over into a complete recession is that consumer spending, which makes up two-thirds or 68% of us G D P which is what we, what we're measuring when we talk about it, whether we're in a recession or not is still pretty high.

It's hard to see us having a recession without seeing a significant decline in consumer spending. Retail sales continues to remain strong. It's growing at 5.4% year over year. And services sales is up eight and a half percent year over year. So people are still out spending money. The retail sales are negative if you, if you take the inflation component out of that.

But that's actually been the case since the middle of last year because inflation has been so high. So I don't know that looking at it on a real basis is necessarily as instructive as folks might think. Obviously the economy has been growing really, really strong strongly for the last year even with a negative sort of retail, real retail sale.

I, I think we're gonna see a continued slowing of economic growth. That's the best outlook that, that we can support with data. And whether we tip into an official recession or not is anybody's guess. But I, I continued to think that we're gonna see something like, you know, 1% negative, 1%, something like that.

For 2020. So the market, I think, still doesn't fully appreciate how long it's gonna take for inflation to fall. And for those of you that have listened to these podcasts and watched these videos for a while, you're gonna be like, man, I, he told us that last quarter and the quarter before and the quarter before that.

Every quarter we've been saying the market doesn't fully appreciate how high inflation is gonna go, how high rates are gonna have to go for inflation to come down, and then how long it's gonna, that process is gonna take for it to, to work. And, and here we are yet again. If you look at the chart on the left hand side of the page, you see the fed.

There are futures out there that, that predict sort of the, the number of, of hikes that we're gonna see from here, and then also what the future of the Fed funds rate's gonna be. And you see that we're sort of stable maybe up a little bit in may and June of 2023. But then by the end of the year you see the, the implied Feds funds or Fed funds rate falling probably anywhere from 50 to 25 basis points.

And so that implies that the Fed's gonna cut rates. And when you look at the right hand side of the. The Federal Reserve members are saying, Hey, we think we're gonna have to get rates to 5%. Maybe a little bit above that. If you look at the 2023 mark you see 5.125 and you see the dispersion of dots there.

There's a lot really between five and six. Only one person really between four and five. So the fed's really saying, Hey, we're gonna need to get to 5% and we're gonna need to hold. And listening to the Federal Reserve has been a pretty good move. As we've been going through this, this economic cycle, , fed Chairman Powell has been really clear about what they're gonna do, and they've done those things so far, and so it would seem to us pretty clear that.

The Fed's gonna hike rates maybe once or twice more. Then they're gonna pause at some point and see how the economy is impacted. See how inflation is impacted with the rate hikes that they've already done. Watch the economy slow down and then see what they need to do from there. Eventually they will cut rates.

But the idea that they're gonna be able to do that in 2023 seems a little bit fanciful to us. So what does that mean from an investment standpoint? Over the past year, we've talked a lot about staying short in bond maturity and avoiding treasuries as interest rates rose because the Fed was rising rates to combat inflation.

Now that we're getting to that peak right now, that that line is, is flat and starting to go down from an inflation perspective, it's important to move from shorter UR securities that have less interest rate sensitivity to those that are more interest rate sensitive. You can see in the chart of the right, on the right hand side of this page.

It outlines bond sensitivity to interest rate changes. In the finance world, we call that duration. And what that means is just a simple way to look at different kinds of bonds. At the top, you see treasuries, two year treasuries, five year treasuries, 10 year treasuries, 30 year treasuries. And at the bottom you see some other kinds of bonds.

Investment grade, corporate bonds US high yield bonds, municipal bonds, mortgage backed securities, et cetera. So the different components of, of the mortgage market. And then you can see the impact of what a one. Rise in rates does, that's the gray bar. And you can see the, the impact of what a 1% decline in rates does.

And if you remember, bonds move, bond prices move inversely to interest rates, so that means falling interest rates are good for bond returns. That's why you see those blue bars going out to the right. And what you see obviously is, is that if rates start to fall or stay flat, even, even 1% or two.

That drives pretty significant returns for 10 year treasuries, 30 year treasuries and not a strong return for the two and five year types of things that we've owned over the last year in a, in a rising interest rate environment. So it's important that we start to flip our mentality on how we think about investing in the bottom market and, and trying to call the peak and interest rates.

Just like trying to call stock market tops and bottoms is very, very difficult, right? So we started. Longer induration or bi securities that were with maturities that were further out earlier in, in the quarter. And we'll continue to do that as we go into the, the rest of the first half of 2023 and maybe even into the second half as well.

So it's important not to try to pick a day and call the top of the, the rate market or the interest rate hiking cycle, just like it's important not to try to. Um, uh, Stock market peaks and, and trust, but we wanna move slowly, make smart asset allocation decisions over time. On the left hand side of this page, you see high yield which continues to outperform this cycle.

We originally started adding to high yield exposure when spreads were closer to 6%. You see they've come in materially, they came in a lot more and then they kind of have blown back out. Recently during some of the banking turmoil we expect that'll pass over time. So even in the event of.

Recession. We think the high yield bond segment's gonna hold up pretty well when we think about current high yield bonds versus prior versus sort of prior recessions and crises. A lot of the, sort of the, the lower rated or less credit worthy high yield bonds have moved into private markets.

So what's left in public markets is sort of the best of the high yield market. And so the idea that we're gonna see spreads go back to where they've been historically. Doesn't seem to jive with what we see happening in the market today. So I would expect as the economy and the market continues to muddle through and we don't have a significant round of defaults, which we don't see happening because corporates are generally balance sheets pretty, in a pretty good place.

Then we think we'll continue to see opportunities in the, in the high yield bond market. So now that we have a backdrop on the economy and interest rates, let's talk about banks. And before we get into the banking system too much and talk about securities losses, I think it's important to look more at, at a macro level about what's been happening over the last few years since Covid.

So if you look at the chart, you see this, this shows total bank deposits in the United States, and you see right on the backside of Covid a massive increase in bank deposit.

Deposit. Move from sort of a trendline growth. It would, would suggest they're close to 15 trillion today to 17 trillion. So there's probably 2 trillion of excess bank deposits. And it was even a little bit higher than that when we got to the middle of last year. So we've had a lot of excess bank deposits.

Bank deposits are also synonymous with inflation. So any, anytime we were in a really high inflationary environment, you're gonna see more deposits cuz all that extra money that the federal government created has to go live somewhere. And so it goes and. In the banking system. So it was, we were kind of expecting as the environment normalized to see total bank deposits move back towards the trend line.

Bank deposits don't typically decline a whole lot, but we start to see them kind of flatten out and maybe move down a little bit, move sideways over long periods of time until they catch back up to a more appropriate trend line. So it didn't surprise many banks that. Deposits were gonna start to run off and move towards a higher interest rate earning opportunities coming into this year.

And I think most economists as well, were, were expecting the sort of the deposit environment to normalize because banks didn't need to have the level of deposits on their balance sheet that that they had over the last, over the last couple of years. So you've seen the charts in the news like the one on the left hand side of the page about the 620 billion.

And I've even seen studies that say it's 1.7 trillion, but I think the 620 billion is a sort of a better number to, to think about what's actually happening in the securities portfolios at banks. And they're talking about unrealized losses and, and that makes a lot of folks really uneasy, right?

You start to worry, is my money safe at banks? And so what I want to do is talk through four reasons. We don't think there's gonna be a full-blown banking crisis. So the first is bank analysts, management teams. And yes, even the regulators, they pay attention to the real value of these bond portfolios.

So even though the accounting conventions allow the banks to sort of record the value of these securities at par, which means they don't have to take into account the fact that interest rates have risen and that the value of them has decline. Analysts that look at the bank balance sheets, then try to value the stocks, do that every day and they value them where they think they are.

You know, in, in the real world, not in the sort of fix accounting world that exists on financial statements. So the idea that they're sort of like hidden from view and that no one's been paying attention to them is a little bit speech. And banks started talking about sort of deposit sorting is the word that has, has come to the to the top of this.

But this, this concept of consumers and, and businesses just saying, Hey my bank deposits aren't paying very much. So instead of having a lot of money sitting in bank accounts and CDs, I'm gonna start to move that money into shorter term treasuries, into shorter term bonds. And that started to happen in the fourth quarter of last year.

It was in a lot of the earnings calls coming into the first quarter of this year. So it wasn't really as much of a surprise to folks in the industry as as, as maybe the, the news might make it out to be second, given the dynamics we talked about in the last page. We expected some of those deposits sort of to run off into normalize.

So again, not really a surprise that deposits are running off in normalizing. The, the third reason is that if you think about what's really been happening folks leave banks that are smaller, some of the mid-size banks that they're less comfortable at, and they move to the biggest players. And if you look at the chart on the right hand side of the page, you'll see that of the 2.5 trillion.

Dollars that are held in hill to maturity securities. These securities thereby is talking about the biggest four banks own more than one point, 1.5 trillion of that. So they own two thirds almost of the, of the securities that we're talking about. And when consumers and businesses get worried, they go run to those big banks.

So the biggest banks with the most security loss exposure are not going to have to sell any of their securities portfolio at a loss because they have cash coming in from other parts of the economy as people get worried and leave and flee smaller banks. So again, the idea that we're gonna have some sort of industry-wide selloff or we're gonna have to realize all these losses seems a little bit challenging for us.

And then lastly, the fourth reason is, The, the mark to market prices have been reflected in securities prices. The, the K B W bank index is down 26% year to date. That reflects probably more than the value of the securities portfolio losses if they had to mark them to market today. So it, it, if, if you know, if anything, it's probably conservative.

So we think the risk has been reflected to this point. So, just to kind of reiterate those reasons. Bank analysts, they pay attention to this stuff. It's not a surprise that the securities portfolios are, are down in, in value. We expected that because of where we've been from a deposit perspective over the last couple years, deposits were higher than they needed to be.

Most of the losses are held at the biggest banks. Those banks have a lot of cash because people are making deposits there when they leave. Smaller, mid-sized. And then lastly the losses at this point have been reflected in equity value. So for those four reasons, I don't think that we have sort of a major banking crisis on our hands.

I don't think that we're gonna have major industry-wide problems. Will we see some smaller banks that probably haven't managed their balance sheet well over the next few months? Yeah, probably. It would actually surprise me if we got through the whole rate hiking cycle. And there weren't any more banks that you know, went under or got sort of acquired at the last minute because they didn't manage their balance sheet well.

But I think it's a small sort of one-off situation that's mostly attributable to poor management, not some sort of contagion or broader economic problem. So so I, I think as, as long as you're being smart about how you're managing your cash, I don't think you have to worry about the money that you have in banks.

I don't think it's gonna spill over and create a bigger problem for the economy. I do think from a stock perspective, bank stocks probably are gonna languish for a little while because they are gonna have to work through those security portfolio losses. And even if they don't have to write them all down in one or two years, it's gonna, it's gonna be a a, you know, contributing factor to a reduced earnings for probably a period of time as rates go back down and, and normalize.

So I think another sort of related factor, but it's important to talk about this before we get into the stock market, is it is the Fed was reducing its balance sheet. And that made sense because they were trying to slow the economy down. They were trying to drive rates higher until the banking crisis happened.

And then they started increasing their balance sheet again. And if you look at the top of this, you see the Fed see that little spike there where the Fed started injecting money into the economy as the banks came to borrow. The ecb you see a slowdown in the sale of their balance sheet, and then you see the Bank of Japan at the bottom putting cash into into the market as well.

And so balance sheets were declining and then they tick back up. And I do think that that money, or I know that that money flows into capital markets, it flows into equities, it flows into bonds. And so I do think that some of the gains that we saw in assets in the first quarter is probably because liquidity started flowing back in the system.

And I think it's very possible that we could see the reverse of that happen. As we go throughout the remainder of the year and banks resume, interest rate hikes and pulling liquidity out out of, out of the system

. So let's talk about stocks. The s and p 500 missed earnings ex estimates for the fourth quarter of 2022 and earnings declined in the fourth quarter.

The consensus, sort of analyst expectation for the rest of the year is that we're gonna get another earnings decline of around 6% in the first quarter. And then we're gonna get some small increases for the remainder of the year. And so we're gonna see something like a 1% increase in earnings for all of 2023.

. The earnings decline has been so far, it's been driven by margins. As cost have been sort of moving up because inflation is higher and companies haven't been able to fully keep up with that cost and pass it on to their customers.

So they've made less money. Even if you believe that the earnings impact of inflation is over and that all good things are ahead analyst earnings estimates are a consensus of $220 a share. And if you apply that 17.5 multiple to it, that's only 3,800 for the s and p and that's below today's price.

For stock prices to increase, we either have to have. Higher earnings, which that doesn't seem likely to happen for the remainder of the year because of what's been going on with inflation and that feeding through corporate, corporate earning statements now or we have to have multiple expansion.

There's only two options. There's not anything else, and earnings could hang in there and, and be flat for the balance of the year as companies begin to sort of reduce staff and innovate to take out costs. It's also notable that a lot of the raw material inputs have declined and so it's possible that earnings could hang in there, maybe beat expectations a little bit.

But even if you have a flattish earnings outlook, that only gets you to that 3,800 number for the s and p to be worth more than 4,000, you've got to have a higher multi. Placed on the earnings. So I gotta multiply those earnings by something more than 17 and a half. Even with an 18.5 multiple which is the average over the last five years.

So kind of a return to the low interest rate pre covid environment that only pushes the valuation of the s p 500 to 4,100. We don't see inflation moving lower slowly enough to push the multiple backup into bubble territory. So to. Significantly higher equity prices seem kind of unlikely. As we look sort of, you know, where we sit now as we head through the, the rebalance of the year.

So even though we aren't that excited about stocks at current prices trying to time the market is not a good idea. You know, trying to figure out exactly when to get in and when to get out and what the multiple's gonna be is not a workable investment strategy that has any sort of data science that can prove that it, that it works over the long term.

So market timing is a really good way to destroy value and to lose a lot of money over time. So the way that we implement our views is thinking about how we tilt our equity exposure. What types of things to buy? Not whether or not we want to get in or get out of stocks at any particular moment in, moment in time.

And, and so kind of to that point we showed this chart last summer, but I think it's worth repeating. It's important to follow the data when we think about how we invest in slower economies, where growth may be a little bit more challenging, where earnings may be a little bit more challenging. And what you don't wanna do is sort of give into the conventional wisdom.

Those things aren't great. So I'm gonna go buy consumer staples, stocks and utilities, and those kinds of Um, growth actually outperforms value in recessions. Going back to the 1980. Same thing is true for slowing economies if we don't actually get a negative G d P print. The traditional value stocks, so your banks, your utilities, consumer staples, sort of old school economy stocks, they need the economy to grow in order for their businesses to grow.

They're generally slow to innovate, slow to take market share. They really need that growth to happen in order for profitability rise. On the other hand, your growth companies, your apples, et cetera. They're building new businesses, they're still capturing more customers, and that continues regardless of the underlying economic activity.

So those companies tend to fare better in recession. So, a, as you think about where to invest for the remainder of the year, it's important to let the actual data from history be your guide and not follow sort of conventional wisdom. And that has borne out, by the way, the first part of this year.

Growth stocks have materially outperformed Let's talk a little bit internationally as, as well. So Europe and the rest of the developed world has outperformed since the market bottom in October. It's outperformed domestic stocks year to date in the first quarter. Some of that is definitely attributable to a bounce from being oversold in 2022, after the Ukraine invasions where people thought that things might go really badly in Europe.

And there was, there was certainly good reason for that view. And then when that turned out to not material. There obviously it was a, was a rally that that happened happened off of that. I, I, I think that there is room though for more growth in valuation for stocks in Europe and Japan.

They've been underinvested and under owned for really the better part of the last decade. That doesn't mean that we believe that sort of European and Japanese economies are sort of better than the us. But it only takes a little bit of a modest repricing, right? Even if earnings can grow just a little bit.

And we get a little bit of multiple expansion from really low levels. We can see the stocks move higher relative to the us. So when you think about the investment opportunity between sort of Europe and emerging markets, we'll talk about that in a minute relative to sort of poultry returns in the us.

It makes Europe look a little bit more attractive. Again, emerging markets really similar. In 2023 in the Outlook we talked about emerging markets at length. Anytime we talk about emerging markets, everybody wants to go to China. What's gonna happen with China and what's gonna happen with Taiwan?

Remember, China is still growing faster than the US but it's only about a third of the emerging markets index. And so Latin America, the rest of Asia developing Europe, Africa those make up two thirds of emerging markets index. So, so yes. Is, is China an important part of emerging markets?

Absolutely. But it's certainly not the. Story. A lot of these merging economies are expected to grow still more than 4% for 2023, which is considerably higher than anything that's projected in the us. And overall we think that companies in, in emerging economies will continue to grow their earnings.

And if we have good economic growth and good earnings growth again with the low multiples that that happen there it would make sense that, that we would see stocks do do pretty well on China as expected. The, the reopening is, is continuing. And there's a lot of skepticism and rightfully so, any kind of economic data that comes out of China, we know a lot of that comes.

The, the ccp and they're not necessarily always super honest about what's going on in, in the country. So we look for reporting from multinationals about what's going on with their businesses in China and around China to get a real sense for what's actually happening in the country. I mean, we've heard from US companies that travel is up, they're growing revenue.

Chinese businesses are doing pretty well post reopening. So I think we can expect that to continue. It won't be a straight line just like everything else. There'll be some bumps in the road, but I think we can continue to. Chinese reopening and contribution to emerging markets and the rest of the world as we go through 2023.

So I think that sums up our equity views with sort of flattish earnings performance in the us. We see opportunities in US growth and then elsewhere in international markets. So what should we actually do given the outlook? So we actually didn't change these from the beginning of the year because I don't think things have changed all that much.

It's important to start reinvesting in sox if you haven't done that already. Obviously. We saw strong returns in the first quarter. It's not going to feel good to start reinvesting if you have a lot of cash or if , you have big bond allocations after what happened last year. You're, you're never gonna feel great about investing when it's a, a good time to do it.

That's why it's difficult to. So start reinvesting in in stocks and bonds. If you're holding too much cash, don't try to pick the top of the interest rate market or the bottom of the stock market. It's really difficult to do that. And then consider diversification outside the United States both for 2023 and the long term.

We do each of these activities on behalf of our clients every day. So if you're wondering sort of how to proceed, it's super easy to schedule a call with us. You can get real professional guidance. We're happy to talk. There's a link in the video notes to do that.

There's no sales pitch. If anybody's, you know, if you talk to folks that have any meetings with us, we just ask questions. We wanna get to know you, understand what you're looking for and then we'll talk about what we do. And if it seems like there's a fit there, then. We'll reconvene and, and propose what a more formal relationship would look like.

And if they're not, we'll try to send you in often in the right direction. So I hope you got a lot out of, out of this outlook. We'd be delighted to talk more about it. If you have particular questions about certain segments of the market or the economy and where things are going, or how your portfolio fits, or whether you're portfolio is the right portfolio for you.

We're happy to talk more about that. And we hope you'll learn a lot in the outlook. And we will talk to you down the.