Summer 2023 Market Commentary

July 12, 2023

Market Recap

For the quarter, U.S. stocks performed well  with the S&P 500 gaining 8.7%.  International stocks also rose, with the MSCI EAFE climbing 3.0%.  Bonds fell, with the Bloomberg Barclays Aggregate Bond Index returning –0.8%.

Outlook

April began the quarter in a positive direction, with the S&P 500 returning 1.6% for the month.  May added to the April’s gains with the S&P 500 inching up 0.4%.  June saw the market bounce much higher, with the large cap index gaining 6.6%.  In all, the S&P 500 gained 8.7% for the quarter.  Added to the first quarter return of 7.5%, the S%P 500 registered an impressive first half gaining 16.9%, which is the second-best first half return in the past 25 years, topped only by an 18.5% gain in 2019.

The decline in the S&P 500 from its all-time high in January of ’22 to the lows in October saw the index fall 25.4%.  Since then the market has risen 24.4% reclaiming more than half of the bear market losses.  As of the end of the quarter, the S&P 500 is just 7.2% shy of surpassing its all-time high.

 

*This graph is not intended to recommend any investment or investment activity.

The most concerning headline from the first half of the year was the sudden collapse of several regional banks, most notably Silicon Valley Bank and First Republic Bank.  Regulators believed then that the factors causing these bank failures were unique to their businesses and were largely a consequence of poor risk management on the part of bank leaders, which was exacerbated by the Fed’s rapid increase in interest rates.  Since then, that opinion has been validated and the crisis appears to have passed.  Presently, the banking system has stabilized, and regulators are working to shore up weaknesses exposed during the recent crisis.

Despite widespread predictions of recession for the past two years, the economy has proven to be surprisingly resilient.  GDP growth has been much stronger than expected, employment remains robust, and inflation continues to cool.  GDP grew 2% in the first quarter and is expected to grow 2-3% for the remainder of the year, unemployment remains near all-time lows at 3.6%, and the Consumer Price Index has fallen to 4.0% from its peak of 9.1% last summer.

Although inflation has fallen quite a lot from its peak, it has not come down as quickly as the Federal Reserve had hoped, leaving the door open for further interest rate hikes in the coming months.  Since the beginning of last year, the Fed has raised their benchmark lending rate from near zero to over 5%.  At this point however, the Fed’s interest rate tightening campaign is likely in the final stages.  Most strategists now expect one or two more rate increases by the end of the year.  Following that, the Fed will likely hold rates steady for a period to observe the effects of higher rates before deciding their next move.

The recent bear market and subsequent recovery has been a long slog without question.  But despite the volatility and negative sentiments, we feel confident that the market will reach new highs as it always has, though it may take some time.  The silver lining for all of the recent turmoil is that higher interest rates have boosted yields on cash savings substantially.  Retirees and savers with large cash balances are now getting a meaningful yield on their savings.  Rates on many cash instruments now top 4% and even 5%.  If you have a large cash balance in a low yielding bank account and have not taken steps to take advantage of the higher available yields, we are happy to help as we have for many of our clients.

The ultra-low interest rate environment following the global financial crisis was unsustainable and it distorted markets in many unpredictable ways.  It shouldn’t be necessary to take unnecessary risks to make a modest and dependable rate of return, such as traditional cash deposit rates.  If the financial system can maintain higher short-term interest rates over the long-term, markets will function in a more normal fashion, which should be a healthy and welcome development for investors in the long-term. 

Given the continued strength of the economy, many strategists have improved their once dour forecasts, expecting continued growth in the economy for the remainder of the year, with little chance for recession until at least next year.  Most also agree that if a recession materializes sometime in the coming year, it is likely to be mild. With so many positive developments in recent months, we remain optimistic that markets will continue to recover and reach new highs, hopefully much sooner than many are expecting.

Thank you very much for your continued confidence in our service and advice.  If you would like to discuss our opinions, outlook, or your portfolio in greater detail, we would be happy to schedule a meeting or a conference call at your convenience.  Lastly, don’t keep us a secret.  If you know someone who would like help planning for their financial future, we will be pleased to speak with them to see if we can assist.