CIG Asset Management Update: “Participating Now and At the Ready for Future Opportunities”

Commentary:

The U.S. Dollar, as measured by the U.S. Dollar Index, reversed its gains in February and fell -2.5%[ix] in March 2023 and contributed to gains in gold and international equities – both are dollar-sensitive investments. Emerging markets equities, represented by the MSCI Emerging Markets Index, gained +3.0%. The S&P 500 Index advanced +3.7%, recovering the prior month’s losses and Fixed Income, as measured by the Bloomberg U.S. Aggregate Bond Index, gained +2.5%.[x]

Our two flagship strategies, CIG Dynamic Growth and CIG Dynamic Balanced, have captured a majority of their respective benchmarks’ gains during March 2023 and Q1 2023.

• The CIG Dynamic Growth Strategy Composite participated in 96% of the upside of the Growth Benchmark during March 2023 and has captured 69% of the Growth Benchmark’s return on a net basis year-to-date.[xi]
• Similarly, the CIG Dynamic Balanced Strategy Composite participated in 94% of the upside on the Balanced Benchmark during March 2023 and has captured 77% of the Balanced Benchmark’s return, also on a net basis year-to-date.[xii]

When we measure these strategies’ returns from January 1, 2022 through March 31, 2023, we were able to avoid 74% of the Growth Benchmark’s losses[xiii] and we were able to avoid 85% of the Balanced Benchmark’s losses.[xiv] As always, past performance is not indicative of future performance and is no guarantee of future results. Like many investors, we are happy to be up in the first quarter of 2023 after a difficult 2022.

Last month, we highlighted in our update four possible tail risks. Each day, we are trying to make sense on behalf of clients the rapidly changing market, including:

• We are encouraged that inflation, as measured by the Consumer Price Index, has fallen from 9.1% year over year in June 2022 to 5.0% in March 2023.[xv] Inflation is still 2.5x the Federal Reserve’s stated target of 2%.[xvi]
• If Banks were to increase rates paid on deposits to compete with a Federal Funds rate of 4.88%, it would cost approximately $839 billion annually[xvii], effectively wiping out 86% of the banks’ net interest income, which as of fourth quarter 2022 was $966 billion.[xviii] Lower net interest income will likely greatly affect the profitability of small to mid-sized banks and may influence them to tighten their lending to businesses.
• $1.4 trillion of U.S. Commercial Real Estate (CRE) loans mature by 2027, including $270 billion due this year. The availability rate of office space – vacant offices plus currently leased space that is not being renewed or listed for subleasing – hit an all-time high of 16.4% at the end of Q1 2023.[xix] As property values fall and more borrowers are defaulting on their loans, the CRE market could be the next big concern for banks, especially the smaller ones. Overall, banks represent 54% of the $5.7 trillion CRE market.[xx]

The world we live in is rapidly changing. Increased tensions over Ukraine and Taiwan raise the possibility of direct conflict between nuclear superpowers. We are continuing to deal with the aftershocks of the deadliest global pandemic in recent history. Climate change is rapidly impacting our environment.

Instead of some new perspective that clarifies all possible scenarios and a clear path forward, we are presented with two opposing visions of the future. One, a downside scenario where stocks may suffer large drawdowns and two, a progressive narrative centered around hopes of technological gains using artificial intelligence, or A.I. Both views are expressed in the stock market right now. On the progressive side, the rally thus far year-to-date has been narrow and concentrated in a few names. Twenty S&P 500 stocks have gained $2.05 trillion in market value year-to-date through March 31. This accounts for 87% of the S&P 500 Index’s $2.36 trillion of gains year-to-date through 3/31/2023. Four of these stocks – Microsoft, Alphabet, Meta and Amazon, are working on incorporating A.I. into their business models and product offerings and then there’s Nvidia that makes processing chips that power A.I., gaining +90% year-to-date through 3/31/2023.[xxi] On the other hand, many other stocks have underperformed the index. UBS has calculated that excluding the gains in these mega-cap growth stocks – the S&P only rose +1.4% in Q1 2023.[xxii] The euphoria in anything A.I.-related reminds us of 1999, when many of the dot-com stocks soared in value with the internet as we now know it in its infancy. As we discussed in November 2021 in What If the Bubble Bursts, a lot of the returns of those companies were wiped out from 2000 to 2002. Gold and many consumer staple stocks provided positive returns during the very negative period.[xxiii]

We persist in our pursuit of navigating our clients’ investments through these turbulent market conditions. It is impossible to predict where these developments will lead, of course, but periods of upheaval can create opportunities for transformative change. We stand at the ready to possibly increase our allocation to domestic equities should the market rally broaden out to other sectors that have not kept up with the mega-cap growth stocks that have led year-to-date thus far. If we experience an overall market correction, then tremendous opportunities could exist in the market which we would endeavor to evaluate and potentially participate in.

We continue to stay the course of risk-balanced investing – take enough risk at this part of the market cycle to reach your goals but not much more. We remain focused on striking the right aggressiveness versus defensiveness in client portfolios given the evolving uncertainty in the markets, the economy, and geopolitics.

Please reach out to Brian Lasher (BLasher@cigcapitaladvisors.com), Eric Pratt (EPratt@cigcapitaladvisors.com) or the rest of the CIG team if you have any questions.