In this latest installment of our newsletter, we share our observations of the markets and the economy in the second quarter of 2023. Click here to go to the full report on our website. Following are the highlights:
- Stock and bond markets continued their upward march in the second quarter ended on June 30, 2023, adding to gains posted in the first quarter and defying expectations by many for weaker market returns at the start of the year.
- The S&P 500 Index posted an 8.7% total return in Q2, putting the broad stock market index up 16.9% for the year-to-date period. The Bloomberg Barclay’s Aggregate Bond Index, which was slightly negative in the second quarter, is still up 2.1% so far this year.
- The strong performance of stocks sent the S&P 500 Index into a technical bull market, defined as a 20% rise off its October 2022 low, and marked the end of the bear market that began in January 2022.
- Overall, the U.S. economy remains steady, with the labor market strong, inflation easing, consumer confidence rising, and economic growth still positive.
- Employers added 209,000 jobs in June and the unemployment rate remained low at 3.6%. Inflation continued to ease in June, with the CPI up just 3% year-over-year, a significant slowdown from its high point of 9.1% in June of 2022. Consumer confidence jumped to a 17-month high in June, reflecting the slowdown in inflation and fewer worries about a recession. GDP growth is currently estimated to be 1.8% in the second quarter, down slightly from the revised 2% growth rate in the first quarter, but still positive.
- That said, some signs of slowdown are emerging. Jobless claims started to tick up in May, though they made an unexpected drop in mid-June. While the services sector continues to expand modestly, the manufacturing sector has remained in contractionary territory for eight consecutive months. And overall inflation remains above the Fed’s 2% target rate.
- The U.S. Federal Reserve held interest rates steady at its June meeting, maintaining its Fed funds policy target of 5.0% – 5.25% and putting its aggressive rate hikes over the last fifteen months on what some termed a “Hawkish Hold.” This means that despite the pause, the Fed expects stronger growth and persistent inflation in the months ahead, which will likely mean additional rate hikes before year-end.
- Looking ahead, the spotlight is now on corporate earnings and overall market liquidity as major factors in determining the course of the U.S. economy and markets in the second half of 2023.
- Given all these uncertainties, our outlook for the economy and markets is mixed.
- We remain cautious on equities in the near term, though our longer-term outlook is positive. The 12-month forward price/earnings ratio (P/E) for the S&P 500 Index is 19 times, which is above both the 5-year and the 10-year averages.
- In addition, this year’s equity market rally has been largely concentrated in just seven high-flying technology stocks, including many we own, namely Apple, Amazon, Microsoft, and Google. A narrow market like this tends not to have the longevity of a more broad-based rally, causing some concern for investors.
- And although aggressive rate hikes may be behind us, we expect to remain in a higher-for-longer interest rate environment until inflation cools and the labor market softens.
- We continue to look for and find some pockets of opportunity in today’s market (see our new investment write-up on Thermo-Fisher Scientific in the final section of this report). In addition, we continue to deploy uninvested cash in short-term Treasuries and money market funds at attractive, low risk, annualized yields at or above 5%.
- We believe that our patient, disciplined approach to active security selection gives our clients better long-term return potential in a cost effective and tax efficient manner.
The Edgemoor Team
