Dow Jones | 42,330 |
S&P 500 | 5,762 |
Nasdaq | 18,189 |
2 Yr Treasury | 3.66% |
10 Yr Treasury | 3.81% |
10 Yr Municipal | 2.63% |
High Yield | 6.66% |
Dow Jones | 12.31% |
S&P 500 | 20.81% |
Nasdaq | 21.17% |
MSCI-EAFE | 12.90% |
MSCI-Europe | 12.10% |
MSCI-Pacific | 13.80% |
MSCI-Emg Mkt | 16.80% |
US Agg Bond | 4.44% |
US Corp Bond | 5.32% |
US Gov’t Bond | 4.39% |
Gold | 2,657 |
Silver | 31.48 |
Oil (WTI) | 68.27 |
Dollar / Euro | 1.11 |
Dollar / Pound | 1.33 |
Yen / Dollar | 142.21 |
Canadian /Dollar | 0.73 |
After declining in 2022, the S&P 500 rallied in a big way in the first six months of the year, closing up over 15% for the year and at a new 52 week high of 4,450. Most investment analysts (LPL Financial’s included) had been forecasting little to no gains for the first half of the year due to the continued headwinds the market was facing. The economy seemed to be in a lose lose situation. Either the Federal Reserve would tighten credit conditions enough to get inflation under control, putting the economy into a recession, or they would back off, avoiding recession but allowing inflation to remain higher for longer. In either case, the experts insisted that corporate earnings would plummet, meaning the 2022 market decline was likely to continue.
On top of the fight against inflation, the new year brought with it three new, potentially significant uncertainties: a series of large bank failures, the U.S. coming close to a default and fear surrounding the dollar’s status as the worlds reserve currency. Yet, even through these uncertainties, the S&P 500 closed out the second quarter double digits from the market’s October 2022 lows. Despite the mainstream media and many “experts” calling for more pain, the stock market is now in a technical new bull market, up more than 20% from lows. The obvious lesson here is that more often than not, when investors look at a crisis and say, “this too shall pass” and stay the course, they are more often right than those who say “this time is different” and head for the exits.
So, what do we know? The good news is the economy seems more resilient than it did to start the year, but the effects of monetary tightening often are felt on a long lag. A recession isn’t out of the picture in 2023, but the odds of a “soft landing” where we avoid recession or experience a very short and mild recession have increased. The banking system seems to have stabilized, the government kicked the can down the road and avoided a default in 2023 and the dollar remains about the same level as it did a year ago. The bad news is the fight against inflation still has a long way to go and the Federal Reserve is still likely to hike rates more in the second half of this year.
The noise and distractions of the last six months have turned out to mean little for the markets so far. What mattered was staying the course and not reacting to the most recent crisis. The economy cannot be consistently forecast and the only way to capture the full return of the market is to ride out their frequent, sometimes significant, and always temporary declines.
As world renowned investor Peter Lynch stated, “The key to making money in stocks is to not get scared out of them.”
Second Quarter Perspectives
The second quarter began with markets still dealing with the uncertainty of the regional bank crisis following the March failures of Silicon Valley Bank and Signature Bank. Those concerns proved mostly overdone, however, as regional banks stabilized in the second quarter. That stability allowed investors to re-focus on corporate earnings, and the results were much better than feared as nearly 80% of S&P 500 companies reported better-than-expected first quarter earnings.. Additionally, 75% of reporting companies beat revenue estimates for the first quarter, also well above the long-term average. Solid earnings were a welcome sight for investors which allowed stocks to drift steadily higher throughout most of April. However, following an underwhelming earnings report, concerns about the solvency of First Republic Bank weighed on markets late in the month and the S&P 500 declined into the end of April to finish with a modest gain.
Fears of a First Republic Bank failure were realized on May 1st, as the bank was seized by regulators. However, that same day, JPMorgan announced it was acquiring the bank from the FDIC, and that move helped to calm investor anxiety about financial contagion risks. The Federal Reserve also helped calm investors from the First Republic failure, as the Fed hiked rates in May, but importantly altering the statement to imply it would pause rate hikes at the next meeting. This was anticipated by investors and as such it failed to ignite a meaningful rally in stocks. Instead, the tech sector helped push the S&P 500 higher in mid-May, thanks to an explosion of investor and financial media enthusiasm around artificial intelligence stocks. However, like in April, the end of the month saw an increase in volatility due to lack of progress on a U.S. debt ceiling extension and rising fears of a default. Ultimately, the politicians kicked the can down the road last minute and a two-year debt ceiling extension was agreed to by Speaker McCarthy and President Biden on May 28th avoiding a crisis. The S&P 500 finished May with a slight gain.
With the debt ceiling resolved, a Fed pause in rate hikes and continued stability in regional banks, the rally in stocks resumed in early June and was aided by several potentially positive developments. First, inflation declined as the CPI hit the lowest level in two years. Second, economic data remained impressively resilient, reducing fears of a near-term recession. Finally, the Fed confirmed market expectations by pausing rate hikes and that helped fuel a broad rally in stocks that saw the S&P 500 hit its highest levels since early in 2022. The last two weeks of the month saw some downside volatility, but the S&P 500 still finished June with strong gains.
Markets were impressively resilient in the second quarter and throughout the first half of 2023, as better-than-feared earnings, expectations for less-aggressive central bank rate hikes, more evidence of a “soft” economic landing and relative stability in the regional banks pushed the S&P 500 to a 14-month high.
Looking Ahead
As we begin the third quarter of 2023, the outlook for stocks and bonds is arguably the most positive it’s been since late 2021, inflation is at a two-year low, economic growth and the labor market remain impressively resilient, the Fed has temporarily paused hiking rates, the debt ceiling is resolved, and there has been no significant contagion from the regional bank failures from earlier this year. The improvement in the near-term economic outlook has been reflected in both stock and bond prices this year.
For the stock market to sustain the current levels, three scenarios need to materialize. 1) No material economic slowdown. 2) Inflation continues to fall. 3) The Fed doesn’t hike more than one or two more times. These scenarios are mostly priced into today’s market, so if one or more of them fails to happen, the we likely see a pullback in the back half of the year. To extend gains meaningfully from here, we would need to see some combination of interest rate cuts, accelerating economic growth and/or increase in corporate earnings later this year.
There have been many positive developments so far in 2023 that have helped the stock market rebound and we are certainly pleased with 2023 performance so far. However, it’s important to remember that risks remain for the economy and markets. The market is pricing in a lot of positive scenarios and if a few of them do not materialize we would anticipate volatility to the downside going into year end.
We hope you are having a great summer season! If you have any questions or would like to schedule a review of your portfolio or financial plan, please do not hesitate to reach out.