[Note: This month's newsletter was prepared and authored by Alexandra Kroot, CFP^®, one of our wealth planners.]

Clients & Colleagues -

We hope your summers have been going well and that you’re staying cool! I’m out in Phoenix, Arizona, so we’ve certainly been feeling the heat. Fortunately, I was lucky to escape for a couple weeks of travel. My sister and I visited Portugal and France, and then stopped in New England on the way back. After indulging in two weeks of delicious pastries, gorgeous sights, and plenty of port wine, it’s nice to be home.

When returning from vacation, it’s always nice to come back to a strong financial market (it’s less nice to come back to a broken refrigerator - trust me). The S&P 500 is up over 17% year-to-date while developed and emerging markets have risen about 15% and 10%, respectively. After a turbulent end to 2022, the year so far only further underscores the benefits of disciplined, long-term investing. By the time investors agree that a recovery has begun, significant gains have often been missed by those trying to time the market. History shows that it's often better to stay invested in an appropriately constructed portfolio in order to achieve your financial goals (as Wedmont’s steadfast clients have shown).

In this month’s newsletter we will provide some important Wedmont updates as well as some thoughts on the economy and the recent U.S. debt downgrade.

As always, if you have any questions or concerns please don’t hesitate to reach out to your advisor at any time.

Have a great weekend,
Alexandra Kroot, CFP^®

Welcome Jac to the Wedmont Family

Recent Award

We’re proud to share that in the most recent list published by FA [Financial Advisor] Magazine, Wedmont was named the 3rd fastest growing RIA among firms that have over $500 million assets under management. This honor highlights our growth from 2021 to 2022. Since then we have continued to grow and now manage over $1 billion on behalf of our clients. We couldn’t do it without you and we thank you for your continued trust in us!

Portal Update

Over the next two weeks we will be updating our Wedmont online portal. The new portal will provide all of the same information and functionality but with a more modern and intuitive interface. Importantly, there are no changes to how you access or log-in to the portal. If you have any questions about using the new portal please contact your advisor for assistance.

The economy is growing steadily

Market and economic expectations have shifted 180 degrees since the start of the year when many investors expected a recession and prolonged bear market. Ongoing economic growth, low unemployment, improving price pressures, and slowing Fed rate hikes have spurred a strong market rally, especially across sectors that struggled last year.

While the economic situation is far from perfect and investors should always be prepared for uncertainty, it's also important to recognize the positive trends.

Perhaps the most important factors are the many signs that inflation is improving. Recent data for both consumer and producer prices show meaningful signs of deceleration toward Fed targets. The Consumer Price Index (CPI) has slowed from a peak year-over-year rate of 9.1% a year ago to 3.2% in July. Core inflation remains elevated at 4.7% when comparing prices this year to last year. These are all positive signs and suggest that while prices could remain high, there is already far less upward pressure.

The current economic environment is far from perfect but is still significantly better than what many had feared only six months ago. This is a reminder that consensus views are not always correct and can change rapidly as conditions shift. That said, with markets having priced in a return to normalcy already, it will be important to stay balanced as the inflation, Fed, and economic situations evolve.

U.S. Debt Downgraded

On August 1, Fitch, a credit ratings agency, downgraded the U.S. debt from AAA (the highest rating) to AA+. Fitch had warned of a possible downgrade during the debt ceiling crisis earlier this year and has sounded alarms since 2011 (almost 12 years ago to the day, when Standard & Poor's was the first credit ratings agency to downgrade the U.S. debt).

The U.S. now has ratings of AAA from Moody's, AA+ from Standard & Poor's, and AA+ from Fitch. Only nine countries, plus the European Union, maintain the top ratings across the three major credit ratings agencies, including Germany, Switzerland, Australia, and Singapore.

While it seems that few investors, economists, and business leaders view the downgrade itself as meaningful, especially because AA+ still represents an extremely low default risk, that does not mean it has not impacted financial markets. After all, investors have benefited from markets mostly moving upward this year, leaving some investors unprepared for even small stock market swings.

The national debt is rightfully a source of investor worry but this has been the case for decades. Unfortunately, there are few examples of the federal government not just running a balanced budget, but operating at a surplus. This last occurred during the dot-com boom under the Clinton administration and, before that, in the early 1970s under President Nixon. It's no secret that the level of the national debt has grown considerably in recent years, from $9 trillion in 2008 to over $31 trillion today. This is largely due to periods of economic turmoil, especially the 2008 financial crisis and the 2020 pandemic, that required government stimulus.

So, what does the latest U.S. debt downgrade mean for investors? In truth, nothing has changed in recent weeks regarding the health of the economy or the long-term fiscal situation for the country. Given how heated the topic of federal spending can be, it's important for investors to distinguish between their political feelings and how they manage their portfolios. Investors should always be prepared for periods of market uncertainty, especially given the low level of volatility this year. The accompanying chart shows that there has only been one pullback of 5% or worse this year which occurred in March during the banking crisis, compared to the average year which experiences several.

Fitch's downgrade reflects the fiscal and political climate with which investors are already familiar. While their decision was based on the familiar factors of worsening government revenues, Fed tightening, and the possibility of a recession, it was largely driven by the "repeated debt-limit political standoffs and last-minute resolutions" in Washington. This is important because it draws a distinction between the ability to pay the country's debts versus the willingness to do so. Most investors would likely agree that national politics has only grown more divisive over the past two decades. It has only been two months since the last debt ceiling standoff was resolved and the agreement only kicked the can down the road to January 2025.

Despite periods of brinkmanship, the U.S. has never defaulted on its debt. The creditworthiness of U.S. Treasuries is critically important not only to everyone that holds these securities - from the largest pension funds to everyday households - but the global financial system is built on the premise that Treasuries are unquestionably risk-free.

Although the Fitch downgrade is impacting markets, it is based on factors with which investors are already familiar. As with many political issues, it's important for investors to separate their concerns and not react with their hard-earned savings and investments.