Investors went into Q2 on high alert for a recession. Who could have blamed them, it was blasted all over the news! Uncertainty about the direction of interest rates, bank failures, and geopolitical uncertainty weighed on the minds of many. By quarter’s end, there was no economic downturn in site and the Fed was expected to keep rates higher for longer. Most stock indices ticked higher.
Bond markets were relatively flat, as were most individual stocks across the board. But the outperformance of a handful of tech stocks (mostly linked to the artificial intelligence movement) lifted the larger cap indexes. Let’s see how the various indicators did and then we’ll dissect further:
|S&P 500 Large Cap Index
|S&P Small Cap 600 Index
|S&P Developed BMI International Index
|S&P U.S. Aggregate Bond Index (total return)
|S&P Municipal Bond Index (total return)
|Dow Jones Equity All REIT Index
|Dow Jones Commodity Index (total return)
SOURCE: DOW JONES, DATA AS/OF 6-30-2023 (DOESN’T INCLUDE DIVIDENDS UNLESS NOTED). HERE IS A COMPREHENSIVE LIST OF RETURNS.
Looking back, here are some observations.
Investors became increasingly confident that any recession is still far off in the distance. We saw a new bull market take place (S&P500 was up more than 20% in June 2023 since the prior October 2022 lows) and stocks extended gains for the second quarter in a row.
Looking under the hood of the stock rally though, much of the S&P500 gains were from a handful of stocks. Apple, Microsoft, and Nvidia were responsible for most of the quarter’s gains. Some other companies chimed in as well, such as Eli Lilly and JP Morgan.
I thought this chart (based on Morningstar index return data) tells the story best. It shows how just a few stocks – and a couple of industries – actually did the heavy lifting in 2023 thus far.
The Federal Reserve did bring interest rates to a pause (first time in 15 months!), yet stated they may continue depending on inflation. For the fifth quarter in a row, the yield curve was inverted. This means one can get better rates on shorter-term bonds than on longer-term ones. Many times (but not always) this indicates a recession is on the horizon. The bond market was relatively volatile, but basically flat overall.
In looking at the 10-year Treasury bond rates, we saw a gradual 3-month rise from 3.49% in April to 3.81% by the end of June. Economic data came out that suggested that rates may stay higher, for longer. This is despite the inflation (CPI) easing to 4.0% year over year. This was its lowest level in two years and well below the June 2022 peak of 9.1%.
Higher interest rates can be good, or bad, for investors – depending on the situation. For those looking for income and yield on their investments, higher fixed-income rates (CDs, bonds, money markets) are a good thing. For homebuyers seeking a mortgage, not so much. Mortgage rates are higher than they have been in quite some time. In fact, homes and condos in the US are less affordable compared to other countries (less afforadble than 98% of them!).
Emerging international markets (think Hungry, Poland, Greece) were up nicely. Larger economies like Japan and Europe were also solidly higher.
Value stocks in the U.S. relatively underperformed growth stocks, the second quarter in a row. Growth stocks (led by tech, of course) have had an impressive run for the first half of 2023, after getting beaten into the ground in 2022.
Commodities were flat to lower, as gold ended lower. Oil prices pulled back a bit – good news for the traveling season as gasoline was more affordable than in summer’s past.
Other Thoughts from the Midway Point of the Year:
OK, so we saw a strong 2023 thus far. Even in a bull market though, it seems like there is always something to worry about. It will feel like the market is lurching from one worry to the next. And sometimes it’s difficult to understand how stocks can keep rising!
Amongst the list of worries (so far) this year: Inflation. Recession. Rate hikes. Bank failures. The housing market. The debt ceiling. Student loan repayments And the list can go on.
Yet here we are, with a decently productive year so far. Stocks have continued to climb the proverbial wall of worry. As each concern subsides or turns out not to be as big of a deal as feared, stock prices rise, little by little. It continues until we look back and see that it was a bull market all along! So let’s enjoy it for now.
As good as the first year has played out for investors, we shall still expect choppiness. And we should still expect negative headlines. Yet that doesn’t mean we should abandon our long-term focus in reaction to near-term news. A patient investor is wise to expect satisfying market returns over time, even as we fortify ourselves for those fewer times when it does not. As Fortunes & Frictions author Rubin Miller, CFA describes in “How Returns Happen”:
“If we don’t know which days will be good and which days will be bad, and the stock market goes up over time, the recipe for success is obvious.”
Just as Miller suggests, we believe investors are best served by building decent portfolios, sticking with them through hot and cold quarters, and waiting for the returns to come in “Field of Dreams” fashion, even when they’re not imminently in sight.
Disclaimer: This information contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the advisor. The information should not be construed as legal, tax, nor investment advice. Never make investment or financial decisions based on information provided here, without first consulting with your professional investment advisor. Data comes from the following sources: Census Bureau, Bureau of Labor Statistics, Bureau of Economic Analysis, the Federal Reserve Board, and Dow Jones. Data is taken from sources generally believed to be reliable, but no guarantee is given to its accuracy.