Quarterly Letter July 2023

Lawrence Peter "Yogi" Berra was a professional baseball player and later a coach. He is known for his illogical yet meaningful comments, like, "Ninety percent of the game is half mental," and "Nobody goes there anymore. It's too crowded." Berra had a knack for contradictions and finding wisdom in the nonsensical. He would have made a fine economist had his baseball career not panned out.

July marked the start of the new quarter, and the 2023 baseball season is on a scheduled break for its All-Star game. U.S. stock markets have been performing well year-to-date, despite much of the growth being within a narrow roster of stocks.

The broad U.S. stock market has returned +16.89%, while international returned +9.47% year to date. Although sluggish during the second quarter, the U.S. bond market returned +2.09% on the year.

Market leadership has been very narrow this year, meaning relatively few, very large companies in the S&P 500 Index have been pulling most of the weight. This year, the seven largest companies collectively are up about +63%. A healthier market environment would have broader participation by more stocks.

Momentum in a baseball season and financial markets can be a strong force. Objects in motion have certain tendencies.

After ten consecutive interest rate hikes, the Federal Reserve (Fed), which has a dual mandate of managing inflation and full employment, recently paused its rate tightening cycle and left interest rates unchanged at its June meeting. Note: ten of the past thirteen tightening cycles since 1953 have concluded with a recession. Remember that a recession's formal dates and turning points are retrospective, whereas stock market movements are typically based on future expectations.  

The labor force participation rate has increased and is now at 62.6%, signaling that more people are entering the workforce. The jobs market remains strong, with the unemployment rate at just 3.7%, which is well below the 50-year average of around 6.1% unemployed.

"A nickel ain't worth a dime anymore."

Berra may have been onto something in terms of monetary policy. As investors, trying to predict the next quarter's winners or the Fed’s next move is a losing strategy. With a long-term view focused on protecting purchasing power and growing wealth, we believe embracing uncertainty and maintaining a disciplined investment approach is key. While short-term fluctuations and market volatility can be unnerving, it is important to recall that history has shown resilience over the long run.

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