Highlights
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Despite widespread expectations for a slowdown, the economy has continued to expand during the first half of the year
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The Fed took a breather in June, but rate hikes are likely to resume
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Stocks had another good month, and YTD markets are up across the board
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Fixed income is still in positive territory for the year, but rising interest rates during the month weighed on returns
Economic Update
The overall economy continues to plug along. The final reading for real GDP growth in the first quarter was revised upward once again, with the final number coming in at 2.0%, up from a prior estimate of 1.3%. Consumer spending, government purchases, and net exports were the three largest contributors, while inventories were the weakest component. The much-anticipated economic slowdown, or recession, continues to be pushed further out into the future. The consensus entering the year centered around a recession beginning sometime in the first half of 2023. However, the Atlanta Fed’s most recent GDPNow forecasting model (GDPNow- Federal Reserve Bank of Atlanta (atlantafed.org)) is estimating growth of around 2% for Q2 2023. If that does turn out to be correct, it would mean that the earliest a recession would be declared would not be until the very end of 2023 or beginning of 2024 as the conventional definition of a recession is two consecutive quarters of negative GDP growth.
The Federal reserve did take a pause from rate hikes following their two-day meeting in mid-June, maintaining the target range for the federal funds rate at 5 to 5-1/4 percent. This was the first time since January 2022 that the FOMC did not raise rates. However, in their post-meeting comments the Fed Chairman was very hawkish, which suggests another rate increase is expected. According to the CME FedWatch Tool (CME FedWatch Tool – CME Group) the probability of a quarter point increase at the Fed’s July meeting is above 90%. The “dot plot,” which shows where each voting member of the Federal Open Market Committee believes the Fed Funds rate will end the year centers around 5.6%, which implies a total of two more rate increases of 0.25% in 2023.
Stocks and Bonds
The S&P 500 displayed a strong performance in June, closing the month with a gain of 6.8%. This positive momentum contributed to an overall rise of 16.9% for the first half of 2023, marking the best first-half performance since 2019. Similarly, the Nasdaq composite experienced significant growth, with a 6.7% increase in June and an impressive 32.3% gain year-to-date, representing its strongest first-half start since 1983.
Mid- and small-cap performance reversed course during the month of June. For the month, the S&P Midcap 400 returned 9.2% and the Russell 2000 rose 8.1%, placing both benchmarks ahead of the Nasdaq and the S&P 500 for the first time in the past four months. In contrast, foreign and emerging markets lagged in June, but still managed to achieve respectable gains of 4.6% and 3.8%, respectively.
All 11 sectors of the S&P 500 were positive in the month of June, compared with only 3 during the previous month. Consumer Discretionary did the best with a total return of 12.1%, followed by Industrials and Materials, which both added over 11%. Technology finished in the middle of the pack for the month but maintains a solid year-to-date lead with a total return of 42.8%. Utilities, Communications Services and Consumer Staples were among the laggards for the month. Energy and Utilities are currently competing for last place so far in 2023, although Energy was the best performing sector in 2022.
Bond yields rose during the month, pressuring returns. The only sector we track below that finished on the plus-side for June were corporate bonds. The 10-year US Treasury Bond closed at 3.83%, up 0.19% for the month, but down slightly from the beginning of the year. The 2-year US Treasury Note, which tends to be closely tied to the Fed Funds rate closed the month just shy of 5%. Except for a brief period in early-March the last time the 2-year note traded above 5% was back in 2006.
Tuning Out the Noise
2023 has been another good reminder that making short-term market predictions is a fool’s errand. Imagine if you had been handed the following set of facts in December of last year:
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- Recession fears will persist going into the first half of 2023
- Inflation will moderate but it will remain well above the Fed’s 2% target
- The Fed will continue raising their target interest rate
- The 2-year Treasury rate will reach highs that haven’t been seen in over 15 years
- Tensions between Ukraine and Russia will remain
- In a period of less than 60 days there will be three of the largest bank failures in U.S. history
- The United States Government will come within days of default due to ongoing debate over raising the debt ceiling
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Would you have predicted that the S&P 500 would be closing out the first half of the year having just entered a new bull market and that the Nasdaq would have had its best start to a calendar year in four decades? My guess is that it’s more likely you would have predicted a continued downtrend coming off a year that saw both stocks and bonds lose double-digits.
Today, the markets are being driven by a narrow set of sectors and stocks. The “Magnificent Seven” (Apple, Microsoft, Nvidia, Alphabet, Meta, Amazon, and Tesla) have contributed mightily to 2023’s strong performance in the S&P 500 and the Nasdaq. Nearly $5 trillion has been added to the value of the Nasdaq 100 since the start of the year. Nvidia joined the “Trillion Dollar Club”, and Apple breached the $3 trillion mark. Newfound fascination with the potential disruptive power of generative AI has been given as the reason for much of the optimism driving the markets.
It is just as important today to tune out the noise and resist the temptation to chase yesterday’s winners as it was a few months back to resist the urge to throw in the towel and move to the sidelines. We are once again reminded that the best chance for meeting your long-term financial goals lies in tuning out the noise and sticking to a well thought-out and strategically implemented financial plan. Ultimately, maintaining investment in a suitably diversified portfolio is the most effective approach to keeping emotions in check and continuing to benefit from the market’s remarkable power of compounding over the long run.
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