Equities Market Overview
For many quarters now, we've been making the case for a constructive economy and the importance of remaining positioned for a rising market. Our portfolios' strong performances for the quarter reflect the benefits of such positioning, as well as the benefit of hewing to our investment discipline. As we see the markets reaching new highs, it's worth noting that we endured some short-term choppy markets in order to be properly positioned for the upturn, signifying the importance of a long-term outlook. Looking ahead, our outlook remains positive: we are positioned for mid-cycle growth, where earning growth rates may be a bit slower, but are still positive and should be sustainable over this phase of the cycle that can last for years. Indeed, we believe that the economy is now in that steady growth phase, where stable higher-quality names usually do better. Another reason we are focusing on stable, larger-growth names is that we believe them to be relatively undervalued: we've seen no meaningful PE expansion despite price gains here, while small caps and mid caps are by no means cheap especially after recent run-ups.
We believe the economic backdrop remains favorable. Despite 15 consecutive interest rate hikes, the cost of borrowing for companies remains historically low, with ample access to capital. Business capital expenditures continue, and may increase, particularly within the information technology and infrastructure related names. The consumer remains the driver of the economic engine, however, and consumer sentiment remains strong, as household net worth continues to climb: should the housing market slow, rises in financial assets and wage increases have the potential to maintain consumer activity. Meanwhile, unemployment levels are below 5%, further demonstrating the underlying strength and resiliency of the economy. It's worth noting that all of this good news has occurred despite the headwinds of higher energy costs and rising interest rates, neither of which were able to derail the economy—despite the myriad concerns voiced by the media.
Equity Positioning
As a result of our outlook, we remain overweight Information Technology as we believe the sector stands to further benefit from healthy corporate balance sheets which are driving an increase in business spending. We are also positive on Financials, which may benefit as consumers shift to savings and investing in order to maximize household net worth. By and large we remain focused on companies with sustainable growth, though we do have some cyclical equity exposure that lends itself to secular opportunities. For example, we are finding opportunities among companies in the industrials sector that could benefit from a U.S. infrastructure rebuild, as we anticipate additional government spending here. Looking ahead, we expect the economy to continue demonstrating its resiliency, especially as the Fed winds down its tightening phase, providing the potential for additional confidence in our growing economy.