Q2 2023 Review | Market Update

ARTICLE AUTHOR

DIRECTOR OF ADVICE SOLUTIONS
MANAGING PARTNER

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Global stock markets continued their winning streak in the 1st half of 2023 (chart 1). The S&P 500 is up over 15% this year with it's 3rd consecutive quarterly gain. Our interpretation of the market's message is that the Fed can engineer a "soft landing," which means that aggressive monetary policy (raising interest rates) might not be enough to tip the economy into a recession. Although soft landings are incredibly rare (chart 2), we respect the possibility that a recession might not come to fruition this year.

There are several encouraging economic developments, some of which are listed below:
1. Strong Housing Market
2. Strong Jobs Market (low unemployment, large number of job openings)
3. Moderate Inflation - Still above the Fed's target of 2%, but much better than 9% last year

But there are also signs of slowing economic activity:
1. Jobless Claims
2. Leading Economic Indicators: Since 1970, when leading indicators are this weak, the economy has always been in a recession.
3. Manufacturing Sector is contracting.

Source: Beyond Wealth

2nd Half of 2023 Outlook:
Over the past 95 years, when the S&P 500 was positive by at least 10% in the 1st half of the year, the median return was 9.7% for the rest of the year and it saw positive returns 75% of the time. Even more encouraging, when stocks were positive by at least double digits following a year of negative returns (2022), stocks rallied by 11.5% with an 80% success rate. Using history as our guide for the rest of this year, this points to additional gains for the remainder of 2023.

This year's rally has been concentrated to the 8 largest technology companies in the world, also known as the Enormous Eight, (Nvidia, Meta, Tesla, Amazon, Apple, Netflix, Microsoft, and Google). These companies have gained an average of 84% in 2023! The S&P 500 is weighted by size, so the larger the company, the higher the weighting it carries in the index. If you were to equal-weight all 500 companies in the index, it would be up 7%. This is somewhat concerning. Typically coming out of bear markets, you would expect to see smaller companies outperforming larger ones, since they are more economically sensitive. That is why we expect smaller companies to play catch-up this year and are tilting portfolios accordingly.

John D. Arndt
Director of Advice Solutions, Caliber Wealth Management
Financial Advisor, RJFS

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