Wright Financial Group, LLC

July 2023 Newsletter

Fed Pauses, Tech Rally Cools in June, and Income Investors Benefit

The stock market tech bubble that had been growing rapidly for months grew slower in June, and the Federal Reserve voted not to raise short-term interest rates for the first time in over a year. Those two developments helped make June a much calmer stretch for the financial markets than the previous month. Will this calmness continue, and if so for how long? And what did June’s developments mean for your portfolio?

Let’s address that second question first. As you may recall, a tech bubble that had been expanding for months expanded further in May, driven by investors eager to jump on the artificial intelligence bandwagon. Any stock related to AI soared in May. As a result, the S&P 500 and the Nasdaq, which both contain many tech companies, finished May with gains while the Dow Jones Industrial Average ended the month in the red. Since our stock portfolios contain few tech stocks, they were also slightly down in May — but June was a whole different story.

Our stock dividend portfolios finished the month up again by about 6% on average, depending on your holdings. That was right on par with the S&P 500’s gains for June, and that’s because the red-hot AI rally cooled down a bit and more conservative stocks were able to catch up across the board. The Dow finished June up by 4.56%, and the Nasdaq added 6.6%.* Year-to-date, after two quarters, the S&P is up 15.1%, the Dow is up 3.80%, and the very tech-heavy Nasdaq is up by almost 30%.**


Skewed Numbers

The main point here, however, is that if you took tech stocks and the AI boom out of the equation, the market’s overall growth for the year would be only about a third of what it is, and more closely aligned with the average growth rate of our stock portfolios. The simple fact is, we don’t invest heavily in highgrowth tech stocks for two reasons. The first is that high growth also means high risk, and one of the goals of investing for income is to lower your risk, as you know. The second reason is that these types of tech stocks typically pay little or no dividends, and dividends are the main priority of an income-based stock strategy, as you also know.

Keep in mind, too, that we’ve seen many tech bubbles through the years, and the ones that don’t burst disastrously, like the dot-com bubble of the late-1990s, do tend to deflate as the competition among these companies levels out. Whether that deflation process will start soon with the AI bubble remains to be seen. Either way, investor enthusiasm in this sector waned in June, and the result was good for our portfolios.

Conditions also improved in June over the previous month for bond investors. In May, our more conservative portfolios of individual bonds and bond-like instruments (which is where most of you have most of your money) were down in value slightly due mainly to a big spike in long-term interest rates during the month. Rates were a bit more stable in June, and as a result, most of you should see your portfolios up by 1-to-2% on average for the month.

Year-to-date our bond portfolios are up about 6-to-7% on average, depending on your holdings, which is great when you recall that last year was our most challenging year ever for these portfolios. With the Fed raising short-term interest rates at a historically rapid pace, bonds faced a constant strong headwind in 2022. Most of you finished the year with your values down an average of 12-to-13% on paper. Today, at the mid-point of 2023, you’ve gained about half of that back, which is good from a psychological standpoint because it obviously feels better to see your values going up rather than down!

But, of course, as I always point out, when you’re investing for income, it ultimately doesn’t matter very much because — whether your values are going up, down, or sideways on paper—your income return is unaffected. Even better, if you’re reinvesting some of that income when your values are down it means you’re buying more shares with less money and dollar-cost-averaging your way to faster income growth in the future! Remember, too, that we’re always making adjustments to our active management strategies on your behalf to give us more opportunities to increase your income return.


Looking Ahead

As mentioned, in June the Fed finally paused their historically aggressive interest rate hiking program for the first time since it started in March of 2022. Since that time, the Fed has taken short-term rates from near-zero to 5%, in an effort to curb inflation. The good news is that the inflation rate has been dropping steadily for nearly a year now, and the Fed is officially nearing the end of its rate hiking efforts—although Chairman Jerome Powell has said they would still like to institute at least one or two more quarter-percent hikes this year.

That may happen or it may not, depending on a variety of factors. As I noted last month, one of the reasons the Fed decided to pause in June was the release of a report by the FDIC addressing the two regional bank failures that occurred in March, which rocked the financial markets and triggered fears of another potential national banking crisis. The report found that the number of regional banks now at risk in today’s economy has risen from an estimated five to over 40.

With the yield curve still inverted, this regional banking issue will remain crucial in the Fed’s decision making going forward. And despite a rising stock market and mostly positive economic data around things like jobs and corporate growth, the possibility of a recession continues to loom. The point is this: The main driving force behind the financial markets throughout 2022 and in the first half of 2023 has been the Fed, and that will continue to be the case for the rest of the year.

As always, if you have any concerns or questions, call our office at any time. Meanwhile, have a great summer!


*“US Equities Market Attributes, June 2023,” SPGGlobal.com, July 5, 2023

**“The Stock Market’s Surprising First-Half Strength,” Axios.com, June 30, 2023

Investment Advisory Services offered through Sound Income Strategies, LLC, an SEC Registered Investment Advisory Firm