Key changes from June report:
- Lowered S&P 500 Index year-end fair value target from 4,800-4,900 to 4,300-4,400.
- Increased equity exposure in tactical asset allocation from 62% to 65%.
- Reduced low duration core bond allocation and increased allocation to small cap equities.
The S&P 500 Index entered a bear market in June, falling more than 20% from its January 3 high. After an 8.4% decline for the month, the index ended the first half down 20.6%, its worst first half since 1970.
Market participants remained on edge due to high inflation and the risk that the Federal Reserve over-tightens monetary policy to combat it, potentially sending the economy into recession. Although energy prices came down some, weakening economic data and the lack of a cease-fire in Ukraine offset the modest gas price relief.
The intense pressure on bonds over the first four months of the year returned in June as the 10-year U.S. Treasury yield hit a decade high 3.5% before falling back to near 3%. Volatility remains elevated.
The Strategic and Tactical Asset Allocation Committee (STAAC) changed its recommended asset allocation for July, shifting from core bonds to small cap equities. The Committee also lowered its S&P 500 Index year-end fair value target range to 4,300—4,400, based on a price-to-earnings ratio (PE) of 18-19 and an earnings per share (EPS) forecast of $235 for 2023.
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