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2Q 2023 Client Letter

Updated: Oct 17, 2023

The quarter began with some trepidation in the markets due to a banking crisis, which was a result of a few poorly run institutions and not a clear systemic issue. But by and large we saw first quarter momentum carry into the second quarter of 2023 with the same general themes of the first quarter: the performance of the market was not reflective of the average company, and equity and bond markets were not in agreement on monetary policy. During the second quarter, the “Magnificent 7” mega-cap businesses –Amazon (AMZN), Apple (AAPL), Google (GOOGL), Meta Platforms (META), Microsoft (MSFT), Nvidia (NVDA), and Tesla (TSLA) – were up on average a staggering 27.38% last quarter and 89.11% year-to-date, partially driven by the market’s current obsession with artificial intelligence as the growth engine of the future. The S&P 500, a capitalization weighted index, was up 8.74% in the second quarter (16.89% year to date) compared to the S&P 500 equal weighted index (RSP-US ETF used as proxy), which increased 3.92% in the second quarter and 6.88% year-to-date. Smaller issues in the Russell 2000 Index were up 5.21% in the second quarter and 8.09% year-to-date.

As the market has continued to have narrow breadth with only a few stocks doing very well, our portfolios have demonstrated resilience with positive absolute performance and continued relief from the painful 2022 bear market. As we expected, there has been a strong rebound in the stocks of the high-quality, well-run businesses we own, which were excessively punished last year. Some examples are:

Through the second quarter, the U.S. economy has shown resilience in the face of high inflation and a dynamically changing monetary environment. The Fed chose to pause their interest rate increases in June after its unprecedented tightening in 2022. Minutes of the Federal Reserve Board meeting suggest that voting members are in favor of a July rate increase and there’s an increased probability of another rate increase by year-end. Economic data can be viewed through two lenses: 1) there are signs of relief, but 2) perhaps it’s too early to celebrate.

What do we mean by that?

Broadly, while COVID immunity is higher, hospitalization and death rates and lower, and treatments are effective and readily available; the aftermath on our behaviors and the economy are lasting. One such side effect of the pandemic is inflation, particularly in service-oriented industries. In response, the United States government passed The Inflation Reduction Act’s which focuses on manufacturing industries. While there are some indicators that inflation is moderating, CPI remains above the Fed’s target rate. The Fed paused its rate hikes in June to gauge the lagging effects of previous increases, but Chairman Powell has indicated that more rate increases are likely. While the U.S. banking crisis appears to be a result of a few poorly run banks that took excessive risks; the over-reaction of regulators will increase capital requirements on large institutions alike and will make regional banks difficult to analyze and forecast in the future. Growth of U.S. and global economies continues, but rates appear to be slowing, and the differences are highly regional and sector specific. While there is a lot to cheer about these days, risks are ever-present. Going forward, we can expect corporate earnings to be as inconsistent as the economic landscape.

F. Scott Fitgerald wrote “the test of a first-rate intelligence is the ability to hold two opposing ideas in mind at the same time and still retain the ability to function.” In this uncertain environment, we strive to contrast all of the available information with the cash generation of the individual businesses. We continue to add to holdings which represent our strongest convictions for financial stability and long-term potential, using market sentiment along the way. If this new bull market continues to mature and equity market participation broadens as past cycles have, we are well positioned. We have come a long way since last October’s lows and the emotions of the market and recent obsessions are subject to change; a possible correction of 5% could occur at any time. However, we remain focused on the long-term, committed to our discipline and confident that the companies in which we have a stake are well positioned, resilient, well run and of attractive valuation.

If you have any questions, as always, please do not hesitate to call.


Heron Bay Capital Management, LLC (“HBCM”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where HBCM and its representatives are properly licensed or exempt from licensure.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index. Return data sourced from FactSet and Orion.


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