Markets in April 2023

Investment Insights

• First, let’s celebrate the positive. The S&P 500 was up 1.56% in April, bringing the YTD return to 9.17%. Now, let’s take a closer look at where that performance is coming from. Just five companies (AAPL, MSFT, NVDA, META, and AMZN) are responsible for 2/3rd of the advance this year. Even more, if you exclude those as well as NFLX, GOOGL and TSLA, the S&P 500 is flat for the year. This lack of breadth is rather concerning as this may show signs that this is just a bear market rally and not the beginning of a new bull market.

• The S&P 500 is trading at 18.3 times next years expected earnings compared to the last 25-year average of 16.8. This is despite slowing growth, tighter lending, lower earnings, still high inflation, another bank failure, and the debt ceiling debate.

• Q1 earnings are currently tracking to be down 3.7%, which would be the second consecutive quarterly drop. Also, forward guidance hasn’t been very positive.

• Employment continues to stay strong but might be showing some signs of slowing.

• The U.S. added 236k jobs in March, in line with expectations. This is the smallest increase since the pandemic but still a strong number. The unemployment rate dropped slightly to 3.5% and wage growth slowed slightly to 4.2% year over year.

• The JOLTS report showed job openings declined below 10 million for the first time since May 2021, down 632k from January’s number. Openings per unemployed dropped from 1.9 to 1.67.

• Q1 GDP came in at 1.1% vs 2% expected. Consumer spending was still strong with most of the decline coming from a decline in business investments and inventories.

• CPI slowed to 5% in March down from 6%. However, core CPI increased to 5.6% from 5.5%.

• Univ of Michigan future inflation expectations survey rose from 3.6% to 4.6%.

• Core PCE came in at 4.6% year over year vs 4.5% expected.

• FOMC minutes showed that many officials were forecasting a mild recession this year.

• First Republic Bank went into receivership and was assumed by J.P. Morgan Chase in another sweetheart deal making the largest U.S. Bank even bigger.

Economic Data

• The U.S. added 236k jobs in March. The unemployment rate dropped slightly to 3.5% and wage growth slowed slightly to 4.2% year over year.

• The JOLTS report showed job openings declined below 10 million, down 632k from January’s number. First time since May 2021. Openings per unemployed dropped from 1.9 to 1.67.

• Q1 GDP came in at 1.1% vs 2% expected. Consumer spending was still strong with most of the decline coming from a decline in business investments and inventories.

• CPI slowed to 5% in March down from 6%. However, core CPI increased to 5.6% from 5.5%.

• Univ of Michigan future inflation expectations survey rose from 3.6% to 4.6%.

• PPI fell 0.5% in March, vs a flat reading expected.

• Core PCE came in at 4.6% year over year vs 4.5% expected.

• U.S. existing homes sales decreased 2.4% in March from February and 22% from a year ago. Sales have slowed 13 out of the last 14 months.

• New home sales increased 9.6% in March from February vs a 1.1% increase expected.

What We Are Doing In The Stock Market

The recent fallout in the banking system hasn’t changed our overall outlook much. We still believe that the stock market is not correctly pricing in the continued pressure on earnings that most companies will be faced with over the next several quarters. We used the stock rally this year to further underweight equities with an overall defensive tilt.

The banking issues will likely lead to a tightening of credit, especially hurting small/mid-size businesses. We are underweight small caps and neutral on value vs growth. We’ve found some value in preferred stocks to add to this month. We have maintained an overweight to money markets and alternatives. We will continue to watch the economic dynamic carefully to take advantage of opportunities as they present themselves.

If you would like us to review your existing portfolio or discuss where to allocate capital in today’s market, please visit www.TalkToFreedom.com to schedule a call.

What We Are Doing In Real Estate

The dramatic rise in interest rates over the past 9 months has dictated a change in our investing strategy. The big “value-add” workforce housing deals are no longer financeable at attractive returns for our investors. We are looking for more conservative new construction Class A properties with immediate consistent cash flow and fixed rate agency debt.

We are also looking at converting motel/hotels into multifamily housing. We believe we can buy this type of property at significantly distressed pricing utilizing very low leverage and undertake a full renovation and still deliver our investors above average IRR’s.

If you would like to discuss investing in our real estate deals, please visit www.TalkAboutRe.com to schedule a call.