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Our Thoughts on second Quarter 2023

Matt Johnson, CFA® - Andy Nugent, CFA®


Market Recap, Portfolio Analysis, and Review


The beginning of the second quarter continued where we left off at the end of the first quarter. We had uncertainty in the stability of regional banks after the failure of Silicon Valley Bank and Signature Bank in the first quarter. That fear was realized in the beginning of May with the failure of First Republic Bank. JP Morgan stepped in to purchase First Republic and that seemed to calm the regional bank fears for the remainder of the quarter. Shortly after the market was concerned about the U.S. Debt ceiling breach and a chance of default on bonds. Towards the end of May an extension was agreed upon which steadied the market. The rate of inflation continued to decline allowing the Fed to put a pause on rate hikes in June. While all of this was going on, earnings in the quarter were positive as more than 75% of the S&P beat estimates. In the end, the market had a nice return, albeit mostly driven by mega-cap tech companies and seemingly any company that had anything to do with artificial intelligence. Is it possible we could get a soft landing as the economy continues to be strong? Possibly, but we are not out of the woods. If inflation doesn’t continue to decline and the Fed determines it needs to continue to raise rates, we could easily see a large impact to the economy and the stock market. Let’s dive a little deeper into the

numbers.


Let’s look a bit closer at all of these sub plots that made up the quarter

Inflation



While still above the Fed target of 2%, inflation continues to slow. As a reminder, the Consumer Price Index (CPI) is a measure of inflation on a market basket of goods, while the Personal Consumption Expenditure (PCE) measures the CPI while removing food and energy. As the CPI is now lower than the CPE, we can infer that inflation in food and energy is lower than other goods. The overall inflation rate for both numbers continue to decrease. Obviously, this is a positive as we continue through the year.


Interest Rates



The Fed raised rates one time in the second quarter. They raised rates by just 0.25% in May and did not raise rates at all in June. Many economists expect a couple of additional small rate hikes in 2023. While this is very possible, if inflation numbers continue a steady decline, we could see the Fed pause for several months. With rates around 5%, it is hard to believe that the fed funds rate was almost zero at the beginning of 2022.


The small increase by the fed was felt in the mortgage rates. Per Bankrate, the average rate for a 30-year mortgage increased from 6.84% to 7.17% in the second quarter.


Yields on Treasuries are increasing, and the yield curve remains inverted. Meaning one-month treasuries are yielding more than 10-year notes. Six-month treasuries were paying 5.24% at quarter end, with money market rates climbing as well.


The rising interest rates have made purchasing bonds more attractive. We continue targeting short term maturities from 3 months to a year. We hold them to maturity and plan to roll proceeds into additional

treasuries.


Sector Analysis



The S&P 500 rose 8.3% in the second quarter and is up almost 16% on the year. These great returns are a bit misleading as the S&P 500 is weighted by market cap and the mega-cap tech companies are on fire so far in 2023 pulling the entire index up with them. However, comparing these returns to say the good old Dow Jones, we can see the Dow was up 3.4% in the quarter and 3.8% on the year. In a nutshell, if you do not have a very large position in companies like Apple, Microsoft, Alphabet, and Nvidia your returns were likely lower than the S&P. The three best performing sectors in the first quarter continued to lead the way. Information Technology, Consumer Discretionary, and Communication equipment were all up anywhere from 13% to 17%. As you can see from the chart above, those three sectors are at or near their 52-week highs. Only three sectors had negative returns and even those were not down very much. Utilities were the worst performer losing a little more than 3%. In this current market environment, we are focusing on high quality companies with good revenue and cashflows to add to the portfolio.


Industrials – We purchased a new position in CSX Corp (CSX). It is a rail-based freight transportation company. It is not an exciting company, I know, but the rails are essential to our country. Sales and Income have been growing consistently and financials are strong. As the price was off from recent highs, we took the opportunity to add it to our portfolios.


Consumer Staples – Pepsi was added to the portfolios this quarter. When talking about quality companies, this one is hard to beat. It is not just a beverage company, they own Frito-Lay, as well as many cereals, other snacks, and let’s not forget the San Francisco treat, Rice-A-Roni. They have global distribution and strong pricing power. Although the stock was not cheap, we wanted to purchase it and decided to do so when the price dropped nearly 10%.


Consumer Discretionary – We added a small position to the portfolio of a company that makes a product that we think is fantastic. On Holding AG is a Swiss company that makes footwear and apparel. They specialize in running shoes. It is the most comfortable shoe we have ever worn. Looking into the financials, they are growing very rapidly. They recently signed a distribution deal with Dicks Sporting Goods, and last year’s female winner of the Boston Marathon was wearing them. A growth company to be sure. It had its initial public offering in 2021, and while we usually gravitate towards more established companies, we think ON Holdings represents great potential return for our clients.


Information Technology – Mega-cap technology is pulling the returns for the S&P 500 higher largely due to the Artificial Intelligence frenzy. We are fortunate to hold one of the best performing stocks of 2023. As such, to be diligent, we pared back our position of Nvidia for clients with outsized holdings, and we continue to maintain an average weighting in the company.


Summary

The second quarter seemed to calm a few big concerns about the economy in general. Uncertainty of regional banks and the debt ceiling were some of the larger topics concerning investors. Are the regional banks safe now? We wouldn’t go that far and we need to take a look at a number of quarters of financials before we are more comfortable. The debt ceiling had many very concerned, and that is a huge deal. Too big of a deal not to get a deal done, so it was a relief to see that agreement signed. We still need to keep a close eye on inflation and rates. Any negative news could have a large impact on the economy. Overall, earnings were strong and although many sectors are near 52-week highs, many are not. Those sectors could bring investment opportunities. We continue to put a premium on quality when adding new positions to the portfolio and expect the market to be volatile in the short term. However, our long-term investment thesis allows us to ride through volatile markets and perhaps even add positions as they dip in price. We again thank you for your continued support in allowing us to help you to reach your financial goals.



Matt Johnson, CFA® - Andy Nugent, CFA®

Sage Capital Advisors, LLC is a Securities and Exchange Registered Investment Advisor. Sage Capital Advisors is headquartered in Sioux Falls, South Dakota. Advisory services are only offered to clients or prospective clients where representatives of Sage Capital Advisors are properly licensed or exempt from licensure. This market commentary is solely for informational purposes and should not be construed as investment advice, it is only intended to provide education about the financial industry. Historical performance results for investment indices and/or categories have been provided for general comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of investment management fees, or the impact of taxes, all of which would have the effect of decreasing historical performance results. Indices are unmanaged and cannot be invested in directly. It should not be assumed that your account holdings correspond directly to any comparative indices. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered unless a client service agreement is in place.






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