July 28 – Market Commentary

As we start the second half of 2023, the S&P Total Return Index is up 19% and is now just ~5% from making a new all-time high. Looking at the chart to the right (Chart1), ever since the top of the bear market downtrend channel was broken and then tested back in January, it has been off to the races for bulls.

But as we look towards the second half of the year, is the market glass half full or half empty?

S&P 500 for the last 24 Months

(Chart 1) Source: Bespoke Investment Group

Global stocks and other risk assets have brushed off regional bank failures, the arrest of a former president (and favorite for challenging candidate in 2024), fears of a US recession, the gating of large real estate funds, disappointment in China’s reopening, and further interest rate increases from the US Federal Reserve, the European Central Bank and other major developed world central banks. In short, stocks have done an impressive job of climbing the proverbial “wall of worry.”

There are a number of factors that can explain this rally. Better-than-expected economic conditions in the first half of 2023 have contributed to this dynamic. Another obvious one is hopes of large productivity gain from artificial intelligence. And finally, tamer inflation numbers, thanks in part to stable energy prices. (Chart 2).

Commodity prices have remained stagnant for the past year or so

(Chart 2) Source: Gavekal Research /Macrobond

The Fed’s battle to bring inflation down has worked well so far, with headline year over year CPI falling for a record (since 1945) 12 months in a row down to its current level of 2.97%. Producer prices (PPI) led CPI on the way up and the way down, and its year over year reading has gotten all the way down to just 0.1%. Forward inflation indicators like the net number of commodities rising in price in the monthly ISM survey predict even lower CPI readings. (Chart 3).

CPI and PPI YoY % Change Since 2020

(Chart 3) Source: Bespoke Investment Group

Therefore, investor’s confidence in a “soft landing” has powered gains across risk assets, leading to a historic first half of the year. But are they right? And more importantly, going forward will the rally continue?

While the bullish narrative appears to be forming, and we suggested this scenario earlier in the year, we still believe there are highly plausible factors of the market facing downside risk.

Tighter Federal Reserve

The Fed has raised interest rates 525 basis points in a historically short timeframe. The effect of these hikes’ filters through the economy with a lag. In addition, the economy and financial system are already showing cracks. After the SVB failure, the Fed injected $400B into the system. As it did this, the “liquidity stars” of the last bull market – META, APPL, MSFT, GOOGL, AMZN, NVDA, TSLA – all soared. Yet, the Fed has now actively withdrawn support and its balance sheet has shrunk by $230B in recent weeks. Even more, it’s not a foregone conclusion interest rate policy has pivoted. A big risk could be hotter than expected inflation prints.

Lack of Breadth

Much of the YTD rally in the major indices has been narrow, confined to the monopolistic tech stocks previously mentioned. These companies are trading at a 30x PE vs. 17x for the rest of the S&P. There are plenty of headwinds to these valuation multiples and while aberrations can continue for a while, it seems implausible the market can rely on this narrow group of stocks for much longer. The equal weight S&P 500 index continues to lag and narrow rallies are rarely a sign of a healthy market.


Recession is the most important domino in all of asset allocation. Recession bells have been ringing for months now, but a combination of fiscal policy and labor market have prevented the 2022 bear market from causing a recession. However, with a deeply inverted yield curve (Chart 4), it is likely a question of when, not If, we enter a recession. The rest of 2023 will be defined by the economy and asset markets digesting the lagging effects of the Fed’s aggressive monetary tightening.

It would be very on brand for stocks to melt up into recession, right before a hard landing. Just as investors start piling into stocks because of the “fear of missing out” on returns. For example, the S&P 500 rallied 11% in the two months after Bear Stearns collapsed in March of 2008. Currently, the S&P 500 is up 7% since the collapse of SVB.

While we believe a recession has likely been delayed, we do not think a harder landing is properly priced into asset markets. The economy is still digesting the effects of lagging monetary policy, and the Fed is likely not done raising rates. The Fed still highlights risks that the market has written off as ambivalent.

10 Year - 3 Month US Treasury Yield

(Chart 4) Source: Gavekal Research /Macrobond

While there is scope for economic data to remain resilient over the near-term and continue to support equities over a tactical investment horizon, we doubt that this resilience can be sustained over the longer term. Instead, the elevated likelihood of a recession over a 12-month horizon will eventually weigh on the performance of equities. Moreover, recovering stock prices suggest that equities are not priced for recession, making them more vulnerable to the downside in the event of an economic downturn.

The Bond market is much more reflective of this dynamic. After moving in tandem with stocks for the past several years, they have meaningfully diverged in 2023 (Chart 5). Additionally, the yield curve remains inverted and bond volatility significantly higher than equity.

U.S. 10 Year Real Yields vs S&P 500 One Year Forward Price Earnings Ratio

(Chart 5) Source: Bloomberg

Whatever the reason, the divergence of bond and equity volatility still raises the fear that equity market volatility will play catch-up with the signal being sent by the bond market (Chart 6).

The divergence of equity and bond market volatility is highly unusual

(Chart 6) Source: Gavekal Research

Despite lackluster fundamentals, market technicals remain bullish. While we are overbought in the short-term, the longer-term trend remains higher, and our equity rules-based strategies remain fully invested.

Ultimately, we believe risk management is the most important factor to wealth accumulation and preservation. We build portfolios with the objective of minimizing downside capture. After an incredible rally to start the year, we believe it’s prudent to begin to have some caution. We will continue to monitor our portfolios as the facts change and will remain tactical as the situation evolves.

Donoghue Forlines Portfolios

In today’s environment, the 60/40 retirement rule is stuck in the past. Advisors are challenged to rethink foundational portfolio elements of investor portfolios – which means seeking out strategies that bolster the “core” going forward. With no cheap assets, tactical and unconstrained management is now more important than ever.

We continue to focus on the need to help craft easy-to-understand, longer-term narratives for Advisors and their Clients. Panicking and abandoning diversified investment strategies during volatility and market crashes/surges is a time-tested losing proposition.

Donoghue Forlines solutions are designed to be client-centric and deliver strong risk-adjusted return streams through both our rules-based, tactical strategies as well as our global macro, fundamentally driven tactical solutions. We aim to capture the majority of the upside but more importantly to avoid the majority of the downside.

We have continued to carefully assess exposure across all our portfolios over the past quarter, as per our risk management process. Our positioning is outlined in more depth below. We have made moves to protect against downside in current markets.

We will stay vigilant with our goal of seeking strong risk-adjusted returns. Please visit our website at www.donoghueforlines.com for our latest information including Fact Sheets for the entire suite of products. We will stay vigilant with our goal of seeking strong risk-adjusted returns. Thank you for your confidence in Donoghue Forlines. Please let us know if you have any questions.

Photo of JeffBest regards,

Jeffrey R. Thompson

Chief Executive Officer
Portfolio Manager

The following reflects Donoghue Forlines’ portfolios positioning as of June 30, 2023.

Donoghue Forlines Dividend Portfolio

Positioning: 50% allocated to large and mid-sized high yielding stocks with a diversified sector exposure and quality orientation. 50% exposure to short-term treasuries.

Subsequent to the quarter, the strategy received a tactical overlay signal to buy in July. On June 6th, the portfolio was reconstituted and rebalanced.

Donoghue Forlines Momentum Portfolio

Positioning: 100% allocated to large and mid-sized stocks exhibiting strong short-term momentum with diversified sector exposure and quality orientation.

During the quarter, there were no technical overlay signals. On June 6th, the portfolio was reconstituted and rebalanced.

Donoghue Forlines Treasury Portfolio

Positioning: 100% invested in intermediate-term U.S. Treasury bonds via ETF exposure.
During the quarter, the portfolio did not receive a technical trigger and remained 100% invested in intermediate-term U.S. Treasury bonds.


The blended solutions combine the best ideas from our rules-based and global macro solutions into long-term investment solutions.

Donoghue Forlines Income Portfolio

The DF Income Portfolio’s asset allocation at the quarter end is as follows: 4% in cash, 89% in fixed income, 5% in equities, and 2% in alternatives.

Target Allocations: *(50%) in Donoghue Forlines Tactical Income Fund; (36%) in Donoghue Forlines Risk Managed Allocation Fund; (12%) in Donoghue Forlines Tactical High Yield ETF; and 2% Cash.

Donoghue Forlines Dividend & Yield Portfolio

The DF Dividend and Yield Portfolio’s allocations at quarter end are as follows: 4% in cash, 70% in fixed income, 20% in equities, 6% in alternatives.

Target Allocations: Donoghue Forlines Tactical Income Fund (49%); Donoghue Forlines Tactical Allocation Fund (19%); Donoghue Forlines Risk Managed Income Fund (15%); Donoghue Forlines Dividend Fund (12%); Donoghue Forlines Momentum Fund (3%); and 2% Cash.

Donoghue Forlines Growth & Income Portfolio

The DF Growth and Income Portfolio’s allocations at quarter end are as follows:4% in cash, 47% in fixed income, 43% in equities, and 6% in alternatives.

Target Allocations: Donoghue Forlines Tactical Allocation Fund (38%); Donoghue Forlines Momentum Fund (20%); Donoghue Forlines Risk Managed Income Fund (5%); Donoghue Forlines Tactical Income Fund (20%); Donoghue Forlines Dividend Fund (15%); and 2% Cash.


The views expressed are current as of the date of publication and are subject to change without notice. There can be no assurance that markets, sectors or regions will perform as expected. These views are not intended as investment, legal or tax advice. Investment advice should be customize3d to individual investors objectives and circumstances. Legal and tax advice should be sought from qualified attorneys and tax advisers as appropriate.

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January 2024 Market Commentary

First off … thank you! Another year is in the books and we are grateful to all our Advisors, Fiduciaries, Brokers, and Partners who trust us with your business