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Second Quarter Newsletter

Responsible Guidance:  Second Quarter 2023 Newsletter, July 2023


After a challenging year for investors in 2022, has the positive performance halfway through 2023 surprised you?  If so, you may have been impacted by a behavioral bias called recency bias.  Recency bias causes you to overweigh or emphasize recent events, like the tough year for investing in 2022.  

To help mitigate behavioral biases, like recency bias, we work with clients to develop customized risk-appropriate portfolios, which are globally-diversified, and rebalanced when needed, all within the context of Your Personal EconomySM. Each client receives an Investment Policy Statement (IPS) that provides the guidelines for their strategy. Additional analysis by your Baron Team helps to understand what your financial position will be in different market environments.

By having your Baron team actively manage your strategy, we take on the responsibility of picking the investments within the strategy and making trades to keep your portfolio within strategy guidelines. Because Baron is an independent Registered Investment Advisor (RIA) firm, we cannot custody or hold client assets.  We must choose an independent custodian for this role.  Currently, our preferred custodian is Charles Schwab (Schwab).  Baron has no allegiance to Schwab, but we choose Schwab as custodian because Schwab is the largest RIA custodian, they have been offering this service longer than other custodians, and they are committed to long-term financial health and safeguarding clients’ assets.  They are deep in the breadth of services they offer, and they are cost competitive.

So, by working with Baron, your assets are housed, or custodied, in a well-known large institution, offering security, proper valuation of your assets, and important tax reporting documentation, but the actual investment choices and trading decisions are handled by Baron.  Further, because Baron operates as a fiduciary for our clients, the investment choices and trading activity is done adhering to your interests.

A Global Perspective

A core objective for our customized Baron Financial Group investment strategies is global diversification.  Global diversification means including investments based both domestically in the U.S., as well as internationally in developed and developing countries.  There are popular benchmark indexes that provide perspectives about the performance of global investments.  

For equities, we monitor the MSCI ACWI All Cap Index.  This index represents equity investments across 23 developed and 24 emerging markets.  The index was up 5.84% in the second quarter, driving year-to-date (YTD) performance up 13.15%.   Global equity performance continues to rebound despite concerns about inflation, interest rates, economic growth, and geopolitical risks.

For fixed income, or bonds, we track the FTSE World Government Bond Index.  The index tracks sovereign debt from 20 countries, denominated in their respective currencies.  It was down 1.79% in the second quarter, but remains positive YTD, up 1.66%.  Global bonds are facing headwinds, as many developed countries are fighting inflation by raising interest rates, which can negatively impact bond performance.   . 

U.S. Economy

The economic data we follow continues to move in a positive direction through the first half of the year.  But there are still some concerning signals with some less watched, but current data points.  The shape of the yield curve, credit availability, and consumer’s expectations for business going forward reflect either uncertainty or negativity.  On a larger scale, concerns about inflation and rising interest rates impacting economic growth remain, but the level of concern for these seems to be shrinking.      

The Bureau of Economic Analysis (BEA) announced in its third estimate for the first quarter of 2023 that real Gross Domestic Product (GDP) increased at an annual rate of 2.0% (the full press release can be found  at https://www.bea.gov). This was the third quarter in a row of positive economic growth.

Due to the normal delay in receiving growth data from the BEA, the Federal Reserve Bank of Atlanta publishes a “nowcast” by estimating GDP growth for the most recent quarter (in this case the second quarter of 2023) using an approach like the BEA.  On July 10, 2023, the estimate for second quarter GDP from the Federal Reserve Bank of Atlanta was positive 2.3%.  Note that this estimate is updated regularly and is subject to change.  The “nowcast,” along with the methodology, and additional information can be found at: https://www.atlantafed.org/cqer/research/gdpnow.

Job growth remains strong.  According to the Bureau of Labor Statistics (BLS), the U.S. gained 209,000 jobs for the month of June, and the unemployment rate remained below 4%, at 3.6%.  BLS indicated job growth was notable in government, healthcare, social assistance, and construction (full press release can be found at:  https://www.bls.gov).

U.S. Stocks

The S&P 500, an index consisting of roughly 500 of the largest U.S. domestic stocks, was up 8.74% in the second quarter, pushing YTD performance up 16.89%. Companies in technology, consumer discretionary, and communication services categories helped lead the way.  For technical analysts and trend followers, the index remained above the 200-day moving average during the entire quarter.

Dividing index components into growth and value, growth-focused stocks continue to outperform in 2023, after trailing value in 2022.

International Stocks

International developed country equities (such as those in the European Union), measured by the MSCI EAFE index was up 2.95% in the second quarter and 11.67% YTD.  Non-developed, or emerging countries measured by the MSCI EM index, was up 0.90% for the quarter and 4.89% YTD.  Some economies outside the U.S are experiencing similar inflation and interest-rate challenges as the U.S.  Plus, the Russia-Ukraine conflict may be adding additional economic stresses.  Considering these factors and possibly others, international developed stocks underperformed the S&P 500 in the current quarter, as well as YTD.  Prior to performance in 2022, the last time international stocks finished ahead of U.S. stocks was in 2017.  


U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index, was down 0.84% in the second quarter, but remains positive for the year, up 2.09%.  The index gauges the performance of investment-grade intermediate bonds.  As concerns about a future economic slowdown, reflected in the shape of the yield curve discussed below, have started to weaken, interest rates in the intermediate term maturities moved higher, causing the negative performance in the second quarter.

The 10-year U.S. Treasury bond yield was at 3.81% on June 30th, higher than 3.48% at the end of the first quarter, but below where it began the year at 3.88%.

If you plot interest rates versus the time-to-maturity to earn those rates, you have created a yield curve. We continue to monitor the changing shape of the yield curve for U.S. debt issues, and what that may signal.  Using the U.S. Government 2-year bond rate as a proxy for short-term rates and the 10-year U.S. Government bond rate as a proxy for long-term rates, we calculate the difference between the rates, which provides a possible indicator for the future direction of the economy.  A steep spread (long-term rates higher than short-term rates) indicates potential future economic expansion and fixed-income investors are compensated for taking longer-term risk.  A flat spread (long-term rates match short-term rates) is a possible indicator of economic uncertainty and longer-term investors are not being compensated for investing in longer-dated securities.  An inverted spread (short-term rates are higher than long-term rates) possibly indicates future economic contraction.

The second quarter finished with the 2-year at 4.87% (and 10-year at 3.81%, per above), keeping the yield curve inverted, but by a much larger spread of 106 basis points (a basis point represents 1/100 of 1%).  At the end of the first quarter, it was 56 basis points, and it was 53 basis points, at the beginning of the year.

The shape of the yield curve may suggest that bond investors remain concerned about future economic growth, which may not be surprising, given the Federal Reserve has been aggressively fighting inflation.

Housing and Real Estate

Commercial real estate, as measured by the FTSE NAREIT All Equity REIT (Real Estate Investment Trust) Index, was up 1.20% in the second quarter, gaining 2.97% YTD.  There is a lot of negative news surfacing about commercial real estate due to rising rates, banking issues and reduced vacancies as work-from-home policies continue.  Commercial real estate is heavily reliant on debt as a business.  Any stresses in the financial industry can impact the important funding that the industry relies on.  The good news is that the concerns are not much of a secret and opportunities remain as the index continues its positive performance for the year. 

According to Freddie Mac (FM), the average 30-year residential home mortgage rate has moved higher with the move up in rates, recently reported at 6.81%.  The 52-week range was 4.99% - 7.08%.  The rate is subject to change and may not be offered in all areas or to all borrowers. 

Natural Resources

The Bloomberg Commodity Index (BCOM) was down 2.56% in the second quarter, driving YTD performance even more negative, down 7.79%.  After being the only positive performing index in 2022, it is the only negative performer YTD for the indexes we cover.  The good news is that lower prices may be reflecting that inflation continues to cool.

 Baron Client Strategies

Planning for multiple outcomes with Your Personal EconomySM is critical to helping our clients answer the simple question "Am I going to be OK?".

As clients know, we are fiduciaries and operate as fee-only advisors, so there is no benefit to us for making investment transactions.  The reasons your Baron Team makes trades are to align clients' portfolios with their customized, risk-appropriate globally-diversified strategy.  Also, we believe the actions we take are potentially strengthening the clients' portfolios or financial positions.  We use this same approach with our own personal money. 

No matter the economic environment, our basic principles remain:
Create a globally-diversified and risk-appropriate strategy.  Validate the investment choices versus peer investments.  Rebalance when needed. Test the strategy in a comprehensive financial plan and obtain regular feedback to update information and advance your financial position.

Your Service Plan

One of our primary roles is to educate our clients to make informed decisions about reaching their goals.  Critical to that process are plan reviews, a process that focuses our attention on your goals, takes account of any changes in your situation and allows us to alter the course, as necessary. If you have had any changes to your financial position or are considering changing financial goals and objectives, please let us know.

Your Personal Economysm

You may have heard us say that we are happy to help clients with issues outside of investing that may have an impact on their financial lives.  We say things like “Lean on us when you are making a decision with anything with a dollar sign involved.”  So, we have been including this section as a reminder of all our services and to share ways in which we can help clients outside of investing.     

Saving is important.  For those of you who plan to retire, knowing how to utilize your resources once your work income stops is critical.  For Baron clients, we develop a plan that helps transfer your savings and investments to your checking account in a way that looks very much like receiving a paycheck.  Knowing the amounts and the specific accounts to draw from will help work toward making your money last as long as possible.  We call this process creating a paycheck system.

To see a helpful video on this topic, visit the blog section of our website and watch Baron Financial Answers Video: How do I create an income stream in retirement? View the video here

As always, it is important to share updates on your financial lives with us.  If you would like to update your plan or just get started, please reach out to us to discuss Your Personal EconomySM.

Concluding Comments

Subjecting yourself to cognitive biases, like recency bias, can negatively impact your financial plan.  Working with a fiduciary like Baron can help mitigate issues like these and helps assure your assets are managed with your best interests in mind, which we believe offers you the best chance to achieve the financial goals and objectives of Your Personal EconomySM..

Baron Updates  

We are proud to continue our annual Baron Financial Group Scholarship, in its 13th consecutive year, awarded to two deserving Fair Lawn High School graduates continuing their education in a business program.  We are happy to help sponsor once again, the Adopt-a-Soldier Platoon’s Salute to American Heroes Gala Event.  This year it will be held on October 19, 2023.  You can read more about both the scholarship and the sponsorship on our blog.

A protective measure we use for our Baron clients is the Trusted Contact form that is kept on file at Schwab and at Baron.  If you have not already completed this form by assigning a trusted contact, let us know.  The more recent Schwab account applications include this form.

As of January 1, 2023, individuals must begin  taking required minimum distributions (RMDs) from their retirement account at age 73, replacing the previous age requirement of 72. In 2033, the RMD age will increase to age 75.  You can read more about RMDs and other educational content, by visiting our  Website Blog. You can find articles on our blog where the Baron Advisors are called upon by journalists for their insights on financial planning and investing. They are quoted in such prestigious media outlets as The New York Times, CNBC.com, and NJMoneyHelp.com, among others.  Please contact us if you have any questions.

Remember that you can also visit our website to gain access to your client portal.  Just click on the client-portal tab, which will allow you to view your account information.The client login requires a username and password to gain access to the portal. Please let us know if you would like to create your portal login or if you would like to learn more about what the portal provides, including paperless statements. Contact Baron at 1-866-333-6659 or at info@baron-financial.com to enroll.

Congratulations to Victoria Cannillo on successfully completing the Envestnet MoneyGuide’s Paraplanning Certificant Program!  And to Greg Cannillo on completing the Financial Paraplanner Qualified Professional™ designation course and earning the FPQP® designation! At Baron, we are always working to improve our ability to offer quality service to our clients.

For our clients and friends, we hope to see you at our Client Appreciation Casino Night Event in New Jersey on September 28th!  Details will follow.

Warmest Regards,

Baron Financial Group, LLC

This  material is not intended to be relied upon as a forecast, research or  investment advice, and is not a recommendation, offer or solicitation to  buy or sell any securities or to adopt any investment strategy. The  opinions expressed are as of July 13, 2023, and may change as  subsequent conditions vary. The information and opinions contained in  this material are derived from proprietary and non-proprietary sources  deemed by Baron Financial Group to be reliable, are not necessarily  all-inclusive and are not guaranteed as to accuracy. Past performance is  no guarantee of future results. There is no guarantee that any  forecasts made will come to pass. Reliance upon information in this  material is at the sole discretion of the reader. Investment involves  risks. International investing involves additional risks, including  risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse  political, economic or other developments. The two main risks related to  fixed income investing are interest rate risk and credit risk.  Typically, when interest rates rise, there is a corresponding decline in  the market value of bonds. Credit risk refers to the possibility that  the issuer of the bond will not be able to make principal and interest  payments. Index performance is shown for illustrative purposes only. You  cannot invest directly in an index. Different types of investments  involve varying degrees of risk, and there can be no assurance that any  specific investment will either be suitable or profitable for a client  or prospective client’s investment portfolio. Historical performance  results for investment indices and/or categories generally do not  reflect the deduction of transaction and/or custodial charges, the  deduction of an investment management fee, nor the impact of taxes, the  incurrence of which would have the effect of decreasing historical  performance results. Inclusion of index information is not intended to  suggest that its performance is equivalent or similar to that of the  historical investments whose returns are presented or that investment  with our firm is an absolute alternative to investments in the index (if  such investment were possible). Investors should be aware that the  referenced benchmark funds may have a different composition, volatility,  risk, investment philosophy, holding times, and/or other  investment-related factors that may affect the benchmark funds’ ultimate  performance results. Therefore, an investor’s individual results may  vary significantly from the benchmark’s performance.