For the first half of 2023, our investment strategy has been successful. We predicted slower growth due to higher interest rates, and although economic indicators have shown degradation, resilient consumers have kept the services side of the economy strong. To mitigate a potential earnings recession, we strategically tilted towards growth and larger market capitalization, which has paid off so far. Our decision to focus on quality, large-cap growth areas of the equity markets has been successful, with a concentrated group of stocks contributing significantly to market returns. Additionally, we benefited from being underweight in emerging markets, particularly China, due to regulatory and stimulus risks that have impacted economic growth.
We did make some incorrect assessments for 2023. We initially expected the U.S. economy and equity markets to face challenges and indicated the possibility of an economic contraction in the first half of the year. But despite the Federal Reserve’s tightening policy and the failure of some major banks, the S&P 500 Index has performed well, showing resilience and significant gains. We may have underestimated the longer-term impact of monetary and fiscal policies implemented in response to the pandemic. Consumer spending remains strong, and there has been no significant weakness in the labor market, contributing to a positive market outlook. While we still believe tighter lending standards and higher rates will have effects in the future, the second half of 2023 may present a different investment landscape.
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