The Value of Staying in the Middle of the Net

Executive summary:

While money market assets have risen in recent years, returns have historically lagged behind a diversified portfolio.
A weaker U.S. dollar is expected to boost returns from international holdings.
No matter what the market is doing, there are always opportunities for tax-loss harvest.

In the world of investing, finding the perfect balance is crucial, as it is when you're skating on a pond or minding the net. Our Economic and Market Review for the second quarter of 2023 provides some valuable insights that stress the importance of avoiding extreme positions.

Here are some key highlights from the Q2 Economic and Market Review:

The temptation of holding cash

As interest rates rise, some investors are tempted to hold more assets in cash or cash equivalents. While this might appear to be a safe strategy, it comes with its drawbacks. Taxes on non-qualified accounts can reduce overall returns, and cash investments do not benefit from equity market rallies when interest rates decline. A diversified portfolio has historically performed better than cash returns over the long term. Additionally, it can be challenging to properly time when to re-enter the market, underscoring the importance of careful consideration when making decisions related to increasing cash holdings.

Currency impact on market performance

One aspect that often goes unnoticed is the impact of currency on market performance. When the U.S. dollar is strong, it bodes well for U.S. equities, while a weaker dollar benefits global markets. For investors who have investments outside the U.S. but reside in the country, a weaker dollar is advantageous because it means better returns when their international earnings are converted to U.S. currency. Looking ahead, there’s speculation the U.S. dollar might weaken, which could make non-U.S. equity more appealing due to the potential for gains from currency fluctuations.

Tax loss harvesting

Tax loss harvesting is a strategy commonly used at the end of the year, where investors seek to minimize their tax liabilities by offsetting gains with losses. However, it's worth noting that opportunities to tax-loss harvest exist throughout the year, even when the overall market is performing well. These opportunities arise when certain stocks experience negative returns.

Fed rate cycles and fixed income

The U.S. Federal Reserve's (Fed) interest-rate policy significantly influences fixed income markets. Historically, fixed income investments usually perform well after a Fed tightening cycle, because interest rates tend to subsequently drop over time, increasing the value of bonds. Therefore, even after a challenging year for fixed income investments because of the higher rates, it’s generally recommended to hold on to bonds and benefit from potential future interest rate declines.

U.S. dollar dominance and inflation

The U.S. dollar's dominance in the world is still significant, with more than 80% of global trade conducted in that currency. While some observers have speculated the U.S. dollar may be losing its strength, its role remains strong, especially during times of uncertainty when investors seek safe havens. US assets. One of the main concerns this year is inflation, and fortunately, recent data show inflation is beginning to ease in the U.S., allowing the Fed more flexibility in its monetary policies.

Stay balanced in volatile markets

Amid market volatility and investor anxiety, it's essential to adopt a balanced approach and seek good advice. Reacting impulsively and constantly moving in and out of investments can be detrimental. Just as goalkeepers have a higher success rate when they stay in the middle during penalty kicks, investors who maintain a balanced and steady strategy tend to outperform those who frequently make drastic moves in the market.

In conclusion, our Q2 2023 Economic and Market Review encourages investors to stay in the middle and strike a balanced approach. Paying attention to currency fluctuations, understanding the impact of Fed rate cycles, avoiding the temptation of cash, acknowledging the strength of the U.S. dollar, considering inflation levels, and utilizing tax loss harvesting are all key elements to optimize investment strategies. By doing so, investors can navigate the unpredictable market landscape with more confidence and potentially achieve better long-term outcomes.

Disclosures

These views are subject to change at any time based on market or other conditions and are current as of the date at the top of the page. The information, analysis, and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.

This material is not an offer, solicitation, or recommendation to purchase any security.

Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.

Nothing contained in this material is intended to constitute legal, tax, securities, or investment advice, nor an opinion regarding the appropriateness of any investment. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.

Please remember that all investments carry some level of risk, including the potential loss of the principal invested. They do not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.

The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.

Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.

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This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an "as is" basis without warranty.

Diversification and strategic asset allocation do not assure a profit or protect against loss in declining markets.

Russell 3000® Index: Measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.

MSCI AC (All Country) World Index: Captures large and mid-cap representation across 23 Developed Markets (DM) and 24 Emerging Markets (EM) countries. With 2,791 constituents, the index covers approximately 85% of the global investable equity opportunity set.

MSCI AC World ex-USA Index: An index that tracks global stock market performance that includes developed and emerging markets but excludes the U.S.

Bloomberg U.S. Aggregate Bond Index: An index, with income reinvested, generally representative of intermediate-term government bonds, investment grade corporate debt securities, and mortgage-backed securities. (specifically: the Government/Corporate Bond Index, the Asset-Backed Securities Index, and the Mortgage-Backed Securities Index).

FTSE NAREIT All Equity Index: Measures the performance of the commercial real estate space across the U.S. economy offering exposure to all investment and property sectors.

S&P Global Infrastructure Index: Provides liquid and tradable exposure to 75 companies from around the world that represent the listed infrastructure universe. To create diversified exposure across the global listed infrastructure market, the index has balanced weights across three distinct infrastructure clusters: Utilities, Transportation, and Energy.

S&P Global Natural Resources Index: The index includes 90 of the largest publicly traded companies in natural resources and commodities businesses that meet specific invest ability requirements, offering investors diversified and investable equity exposure across three primary commodity-related sectors: agribusiness, energy, and metals & mining.

ICE BofA 3 Month U.S. Treasury Bill Index tracks short-term U.S. government debt instruments.

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