Obermeyer Wood News - Summer 2023
MARKETPOINT: Innovation and Resilience to the Rescue
With summer in full swing and markets seemingly in bloom, it is important to remember that six months ago, nearly every economist and cable TV talking head was predicting that 2023 would be another painful year for the economy and investors. Yet here we are, halfway through the year, with markets in the green and chatter of a “soft landing” getting a little bit louder. However, we aren’t ready to spike the football just yet. If we have learned anything from our decades as investors, it is that humility and patience are key tenets of successful, long-term investing. While we are heartened by the resilience of the economy and the improvements in the markets, we know nothing is guaranteed.
Sentiment Turned Positive
The major indices produced a second consecutive positive quarter, sustaining the encouraging rally that started late last fall. It was an impressive rebound for most technology companies, driven by the rapid release this spring of artificial intelligence (A.I.) tools and investors embracing their promise, buoying the broader technology and communication sectors. It is important to note that nearly all of the gains in the S&P 500 have been driven by the performance of seven mega-cap tech stocks, demonstrating the narrow nature of that index’s performance year to date.1 Meanwhile, fixed-income investors seeking income on cash continued to benefit from attractive yields in money market funds and short-term treasuries, and longer-duration bonds faced continued pressure from rising interest rates.
*Performance calculated based on market capitalization growth and does not reflect price performances
On the economic front, concerns about the banking sector began to fade this spring as depositors regained confidence in the institutions. The Federal Reserve plodded along in its battle against inflation and worries lingered about a potential moderate-to-severe recession. Adding to these anxieties was the impending debt ceiling issue before Congress. Yet investors received mostly positive news on each of these fronts, further fueling positive sentiment in the markets. In early June, an agreement to suspend the debt ceiling and enact spending cuts was reached between the Biden administration and House Republicans, reassuring investors who had anticipated an uglier conclusion to the Beltway drama.
Later in the month, we learned that the inflation rate in May cooled to its lowest annual rate in over two years, with the consumer price index showing a 4% year-over-year increase, in contrast to the peak of 9% observed in July 2022. At its June meeting, the Fed paused interest-rate hikes, leaving the Effective Federal Funds Rate in the 5%-5.25% range after 10 consecutive hikes.2 However, Chairman Jerome Powell signaled that up to two more hikes could be on the table between now and the end of the year.3
Powell and his colleagues’ decision to leave the door open to more hikes is primarily due to continued news showing economic resilience, and even growth. The U.S. economy exhibited much stronger than expected growth in the first quarter, with gross domestic product expanding at a 2% annualized pace from January to March.4 Job reports continued to surpass expectations, with the addition of 339,000 new jobs in May, although the unemployment rate rose to 3.7% from a 50-plus-year low of 3.4% in April. Remembering that one of the Fed’s current goals is to cool off the economy to rein in inflation, the continued strength in some pockets of the economy gives the Fed more room to raise rates to combat inflation.
The recent pause by the Federal Reserve has left many wondering about its implications. Is this a sign of a potential soft landing for the economy? It is too early to tell, especially considering the Fed has stated it will raise rates again this year, and the positive news on the inflation front doesn’t mean the dragon has been slain. The Fed will keep its foot on the brakes until inflation gets closer to 2%, or until something in the economy significantly worsens. Regardless, it is encouraging that two key pillars of the American economy–growth and employment–have held strong thus far amid the tightening.
Looking Ahead
Emerging cracks that we are paying close attention to include the potential impact on consumer behavior of student loan payments restarting later this year and the continued risk of a credit crunch. The validity of concerns about liquidity drainage from the financial system resulting from this spring’s banking crisis and the debt ceiling deal is still to be determined. And weakness in the $20.7 trillion commercial real estate sector5, specifically in office buildings, is causing increasing worry among investors and policymakers. The shift to more flexible work options has hurt office property valuations, and the era of cheap debt is over, putting both landlords and exposed banks on fragile footing. Treasury Secretary Janet Yellen confirmed these anxieties when she recently said, “I do think that there will be issues with respect to commercial real estate.”6
As we head down the back half of the year, investors should be prepared for continued volatility if any of these cracks start to widen, or if significant new ones emerge.
The market will remain laser-focused on inflation numbers and Fed policy, waiting for more certainty around the Fed’s path to peak rate before a sustained recovery takes hold. The massive tailwind of A.I. innovation and product releases that have been progressing at breakneck speed is likely to continue. The concern is that valuations in these stocks may be increasing faster than the companies can grow, which warrants skepticism as bubble-like characteristics emerge. And with the prospect of A.I. regulation looming and likely, it is uncertain whether the tech sector’s resurgence will endure amid higher interest rates and persistent inflation.
We are also paying close attention to the geopolitical environment. The Russian war on Ukraine remains brutally deadlocked, with an unclear path to its conclusion. Investors will continue to closely monitor the war’s impact on energy markets and the Eurozone economies, which fell into a technical recession earlier this year. Meanwhile, the relations between the U.S. and China appear to be thawing, as Secretary of State Antony Blinken met with China's President Xi Jinping and Yellen announced plans to meet with senior Chinese officials in July. And in June, Indian Prime Minister Narendra Modi completed a four-day state visit to the U.S., which proved fruitful for both countries on symbolic, geopolitical, and economic levels. The U.S. successfully secured significant trade and investment deals with India, whose population recently surpassed that of China to become the largest in the world7 and whose economy is expected to continue to be the fastest-growing emerging market economy in the world through 2024.8
While there is a lot to be encouraged about, investors aren’t out of the bear-infested woods just yet, and the bulls might want to practice more patience before declaring the start of a new market cycle. If you have any questions about your positioning or our investment strategy, please reach out to our team to set up a review meeting.Citations
[1] https://www.reuters.com/markets/europe/top-heavy-ultra-narrow-wall-st-needs-bulk-out-2023-06-02/
[2] https://fred.stlouisfed.org/series/FEDFUNDS
[3] https://www.federalreserve.gov/newsevents/speech/powell20230629a.htm
[4] https://www.bea.gov/data/gdp/gross-domestic-product
[5] https://www.reit.com/data-research/research/nareit-research/estimating-size-commercial-real-estate-market-us-2021
[6] https://www.marketwatch.com/story/treasury-secretary-yellen-warns-of-commercial-real-estate-issues-that-could-strain-banks-1bab9d83
[7] https://www.un.org/development/desa/dpad/publication/un-desa-policy-brief-no-153-india-overtakes-china-as-the-worlds-most-populous-country/
[8] https://www.worldbank.org/en/publication/global-economic-prospects
OBERMEYER WOOD IN OMAHA: Berkshire Hathaway Annual Shareholder Meeting
For the 26th year, our team descended on Omaha, Nebraska, alongside 30,000-plus investing enthusiasts for the annual Berkshire Hathaway annual shareholders meeting. Prior to the meeting on Saturday, May 6, our team arrived a day early to take in the various shareholder and industry events around the city while also partaking in teambuilding activities.
The following morning, wake-up alarms for the Obermeyer Wood group began going off around 4:30 a.m., as the team headed to the CHI Health Center in downtown Omaha to get in line outside the arena. In what has become a familiar scene on television, the earliest risers flood into the arena when doors open at 7 a.m. to secure the first-come, first-serve seats and settle in for a full day of Berkshire action.
After getting the crowd warmed up with an always funny and often self-deprecating video, Warren Buffett and Charlie Munger took their usual spots front and center, with plenty of Coca-Cola and peanut brittle within arm’s reach. After providing a short annual report on Berkshire’s financials, Buffett and Munger answered questions from shareholders for over five hours. For part of the Q&A, the infamous duo was joined on stage by their two lieutenants, Greg Abel and Ajit Jain.
Perhaps the most notable takeaway from the meeting centered around succession at the company, which is currently led by 92-year-old Buffett and 99-year-old Munger. For the first time, Buffett used the annual meeting to reassure shareholders that the company will be in capable and experienced hands when Abel eventually takes over. Both Munger and Buffett praised his leadership and performance for the company over the last two decades, and they also reassured the crowd by explaining that Abel has shown he shares the founders’ famous conviction around long-term investing with a value-oriented approach.
Visit our blog page to watch a recording of our May virtual event, where our team shared in greater detail our experience at the conference and answered questions about how the event helps to guide our investment philosophy.
RECOMMENDED READING: Books for New Grads
Looking for a good book for a new graduate? We want to help. The books below are among the ones our team recommends to clients and their families who are searching for insight into personal finance for those just entering an exciting and new phase of life:
How To Money: Your Ultimate Visual Guide to the Basics of Finance
This full-color, illustrated guidebook from New York Times bestselling author and financial expert Jean Chatzky, Kathryn Tuggle, and their team at HerMoney offers step-by-step guidance on a wide range of personal finance topics of interest to new high school and college graduates. Each chapter covers the basics of financial literacy while offering a deep dive into budgeting, spending, saving, investing, and much more. Entertaining and practical, this book is designed to keep the learning going after your graduate leaves campus.
No One Ever Told Us That: Money and Life Lessons to My Grandchildren
If you could share some of your biggest life lessons with your kids or grandkids, what would you most want to tell them? John D. Spooner does just that in this book, written as a series of nearly 60 brief letters to his two grandchildren. Each letter focuses on a different topic of importance, from professional growth to personal finance to the pursuit of happiness. Spooner shares plenty of personal anecdotes along the way that inform his thinking, and his tone is both warm and witty. Since each chapter is just a few pages, it’s easy to read and absorb a chapter a day.
The Power of Habit: Why We Do What We Do in Life and Business
In this engaging, well-researched book, Charles Duhigg examines the science behind habits, how they affect our lives, and how to change them. The book is divided into three main sections, each of which takes a deep dive into the habits of individuals, organizations, and societies. Duhigg breaks down the three-step “habit loop” – cue, routine, and reward – that triggers our actions, then details exactly how to break unhealthy cycles. While this book contains valuable information for readers of all ages, it’s especially helpful for new grads looking for a practical framework to achieve personal and professional success.
Please reach out to a member of our team if you’d like us to send one of these books to a new high school or college graduate in your life.
FIRM UPDATE
New Team Member: Jonathan Stokely, Chief Operating Officer
We are delighted to welcome Jonathan to the team as Obermeyer Wood’s chief operating officer. Jonathan oversees our firm’s administrative and operational functions.
Before joining Obermeyer Wood, he worked at CME Group, Deutsche Bank, and, most recently, Arthur J. Gallagher. He has also worked with several small businesses, startups, and nonprofits in a consulting capacity. Jonathan earned his MBA in finance and entrepreneurship from the University of Colorado at Boulder and a Business Administration degree with a Minor in Technical Communications from the Milwaukee School of Engineering. Please join us in welcoming Jonathan!
Obermeyer Wood Recognized
The awards below are a credit to our whole team’s commitment to helping our clients protect and grow their wealth through thoughtful investment portfolio construction, detailed financial planning, and holistic wealth management.
FORBES
America’s Top Wealth Advisors: This annual ranking includes the top 250 financial professionals in the U.S. with a “track record of success over time” and almost $1.3 trillion in assets, collectively. Wally Obermeyer, our president and co-founder, was named the No. 3 Wealth Advisor in Colorado and No. 112 in the nation.
Best-In-State Wealth Advisors: Obermeyer and Executive Vice President Ali Phillips both made Colorado’s top 10 list, at No. 3 and 10, respectively. Senior Vice President Dana Nightingale, CFA, CFP©, was close behind at No. 16. Obermeyer Wood was also the highest-ranked independent advisory firm in the state of Colorado.
COLORADOBIZ MAGAZINE
Best Wealth Management/Financial Planner: Our team’s cumulative effort to provide our clients with independent investment advice, financial guidance, and problem-solving was lauded in the “Best of Colorado 2023 – Finance” category.
Please visit our website for more information about third-party recognition, including descriptions of methodology and other disclosures.
Financial Planning Services
Financial planning is as personal and individual as you are, and our team is here to collaborate with you on this crucial part of your overall wealth management strategy. Our financial planning team can help you every step of the way. We want to partner with you on developing personalized plans, including (but not limited to) cash flow analysis, investment goals, risk tolerance, tax return analysis, retirement planning, “what if” scenarios, portfolio stress testing, balance sheet analysis, buy/sell transactions, and estate plans. Later this fall, we will be excited to introduce a new process-focused approach to working with clients on financial planning. In the meantime, reach out to your relationship manager for more information.