Monthly Market Commentary

These monthly market commentaries share a synopsis of the U.S. financial markets with intelligent insights.

August Investment and Economic Commentary

The second half of 2023 is off to a good start on the equity front while fixed income continues to tread water watching the Fed.  One of the more noticeable trends in July was the improved breadth across the equity markets in the US.  After watching a handful of big cap growth stocks drive performance earlier this year, small caps rallied in the month and value managed to outperform growth.  Overseas markets also saw improved breadth across most countries and regions.  In the fixed income markets, interest rates moved up further out the yield curve, impacting the Bloomberg Aggregate index performance.  A small bright spot was the yield curve inversion was reduced modestly with the move up in the long end. 

Overall

• The S&P 500 was up 3.2% in July and is up 20.6% for the YTD.  
• The Bloomberg Aggregate Bond Index was down -0.07% in July and is up 2.0% for the YTD.            

Domestic Equity

• US and overseas equity markets had positive returns with greater breadth across size, style, sectors and regions.  Continued improvement and strength in many economic indicators provided investors with support for measured optimism about economic growth in most regions.
• Illustrating the improved breadth in the market, small cap stocks outperformed large cap stocks by more than 2.6% in July.  Value stocks outperformed growth, building on recent strength in value oriented sectors, though growth remains the higher performer for the YTD.

International and Global Equities

• Overseas equity markets performed in line with the US and followed similar patterns of value and small outperforming growth and large.  Japan continues to perform well over recent months while many European markets rallied in July.
• Emerging market stocks outperformed developed markets, boosted by a weaker dollar, improving economic conditions, and a rebound in Chinese stocks.   

Fixed Income Markets

• US interest rates rose at the long end of the curve, modestly reducing the Yield Curve inversion but negatively impacting the broad bond market return for July.  Spread products, including investment grade and below investment grade credit, delivered positive results for the month. 

Specialty Markets

• REITs delivered returns in line with broad equities while Commodities jumped due to a move higher in oil prices.

US Equity Sectors

• All sectors posted positive returns in July, led by Energy, Communication Services, and Financials, reflecting the broadening of the equity market drivers.

August 2, 2023

Dear Valued Investor,

Making economic forecasts and stock market predictions can be humbling. It’s especially tough when you expect stocks to go higher and get a big drop instead. The environment today is the opposite, but still tricky, as recession hasn’t followed the chorus of predictions. In some ways, figuring out what to do now that stocks have gone up is as difficult as considering what to do when stocks are down.

Today’s more fully valued stock market is pricing in an increasingly optimistic outlook for economic growth and corporate profits, but the economy still faces challenges that will likely lead to slower growth in the second half — and perhaps even a mild economic contraction. So why stay invested?

First, it’s difficult to time the market. We’ve seen this play out several times in just the past few years. For example, few foresaw the strong market rebound that occurred as we came out of lockdown in 2020, or that inflation would become the ongoing problem that we’re still dealing with today. We saw it again this past spring – professional portfolio managers and investors alike were broadly pessimistic about the stock market, particularly in the wake of several bank failures. Yet, stocks have gone virtually straight up since.

Another reason to stay invested is recent and encouraging economic data, which supports higher stock prices as the odds that the U.S. economy achieves a soft landing have increased. The U.S. economy grew 2.4% in the second quarter, a solid pace for a typical economic expansion these days. The job market remains healthy with near record-low unemployment. A resilient economy has fueled better profits for corporate America than most expected, setting up a likely end to the ongoing earnings recession in the current quarter.

Third, lower inflation may continue to support stocks in the months ahead as the Federal Reserve (Fed) winds down its interest rate hiking campaign. The Fed’s preferred inflation measure (the core PCE deflator) dropped a half point in June to 4.1% and could potentially reach the mid-3s by year-end — not far from the central bank’s 2% target. Lower inflation may also be good news for bonds by enabling the Fed to cut interest rates in 2024 as most expect.

Fourth is historical comparisons. Since 1950, stocks have gained an average of 40% one year following bear market lows. Nearly 10 months since our bear market low, our current bull market is up about 28% so far. Keep in mind, once the S&P 500 has gained 20% off a bear market low (which it did June 8, 2023), the one-year average historical gain is 18.9%. We’re also in the best year for stocks within the four-year presidential cycle. In other words, more gains, and record highs, in the coming year are reasonable to expect.

Finally, for those worried that gains in the broad market have been driven by only a handful of stocks, stock market leadership has started to broaden out. We believe that’s a necessary condition for the next leg of this bull market. Small cap stocks fared better than large caps in July and the average stock in the S&P 500 rose more than the index over the past two months.

For those who may have missed the rally, we would advocate for dollar cost averaging which is simply investing at regular intervals over a period of time. This can be a great approach as it takes emotion off the table. Consider maintaining a cash reserve so you can take advantage of dips that will inevitably come and use volatility as an opportunity to get back to long-term target allocations.

Please reach out to me if you have any questions.

Scott Krase