Mid-Year Update

Before I dig into what has transpired over the first half of 2023, let’s revisit the reasons why we started investing in the first place.  Good investing is always goal-focused and planning driven, so ideally, we started with certain goals.  A common goal is retiring at a certain age and with a certain income.  The goals have probably evolved over time and may include multiple generations, but they are still goals to invest for.

The design of your investment portfolio is based on taking the least amount of risk to achieve the stated goals.  Our portfolios are designed with the weighty evidence of history to give us a sense of how markets behave over time.  That history includes economic scenarios like this one with high interest rates and high, but falling, inflation.

If our goals haven’t changed and the investment process is solid and based on the long-term history of the markets, then our best course of action is to stay the course.  That may sound like a cliché at a time when you want something more complex, but that doesn’t mean that something else will work better.

That being said, I'm even more delighted than usual to report to you at midyear on the events of the last six months and on the further progress of our long-term plan.  After declining sharply for most of 2022, the S&P 500 ended the year at 3,840.  As the year turned, it seemed as if the economy might well be in a no-win situation. Either the Federal Reserve would tighten credit conditions enough to stamp out inflation, thereby plunging us into recession, or it would relent, avoiding recession but permitting inflation to burn on. In either case, we were assured that corporate earnings must be about to decline significantly, boding ill for the stock market.

To this apparently intractable situation, the first half of 2023 added three new and potentially critical uncertainties: the specter of U.S. sovereign default, a wave of bank failures that seemed to threaten the banking system itself, and a renewed outbreak of fear surrounding the dollar's status as the world's reserve currency.  Yet after enduring that relentless onslaught of crises, real and imagined, the S&P 500 closed out the first half of 2023 at 4,450, up 15.9%. In the process, Congress and the White House manufactured a solution to the manufactured debt ceiling crisis, and the bank failures that were supposed to be the tip of the iceberg turned out to be only an ice cube.

The recession that every economist predicted has been postponed…again.  It very well may still be coming, but so far, the economy seems more resilient than the consensus was giving it credit for just a few months ago.  The Federal Reserve says it is probably not done tightening, but it is getting very close to the end.  Although inflation is still a long way off from the Fed’s target of 2%, it has moderated considerably over the last year. 

In light of these recent developments, I am reminded of Peter Lynch's timeless maxim: “The real key to making money in stocks is not to get scared out of them.”  In that sense, these six months represent for me—and I devoutly hope for you—a successful investing career in a microcosm. You and I did all that could be asked of us: amid universal pessimism, we didn't get scared out.  Rather, we stayed focused on our goals and our long-term plan, with confidence that the management of the companies we own were stewards of our capital with diligence while they sought out new and potentially greater opportunities amid the adversity.

In summary, everything that happened (and didn't happen) in the first half of 2023 turned out not to matter much. What mattered was that together we chose not to react. Is it possible that a lifetime of patient, disciplined investment success is just that simple? I certainly believe it can be, and I sincerely hope you do too.