Monthly Market Commentary

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

July Investment and Economic Commentary

Welcome to the second half of 2023.  The first half of 2023 saw equity markets deliver close to 17% returns in the US and nearly 12% in developed markets.  The results are a pleasant turnaround from 2022, a year most investors would prefer to forget.  Much of the strong performance for equities has come from a short list of stocks that have posted outsized returns – Nvidia (up 180+%), Meta (up 140+%) and Tesla (up 120+%) – that all had terrible returns in 2022.  Outside of these big winners, the market performance YTD has been a bit more subdued, though still positive.  Investors are cautious with concerns about a potential economic slowdown, persistent though declining inflation, and a Fed that is attempting to soft land the economy.  The bond market has recovered from its own terrible 2022 but has given back a bit of its early returns as interest rates remain elevated and the yield curve inverted. 

Here are a few highlights from what occurred across the public markets during the month and quarter.

Overall

• The S&P 500 was up 6.6% in June and 8.74% for the quarter.  
• The Bloomberg Aggregate Bond Index was down -0.36% in June and down -0.84% for the quarter.  

Domestic Equity

• Equity markets rallied in June, supported by easing of inflation and promising economic data.  The returns helped deliver solid Q2 returns across most segments.  Investors maintained a cautious view on the economy and how the Fed will respond in the second half.
• Small cap stocks delivered strong returns in June, though large cap stocks had stronger returns for the quarter.  Value bounced back in June but trailed growth stocks for the quarter and YTD.  A small number of names in the technology and consumer sectors accounted for a high percentage of the markets sizeable mid-year returns.

International and Global Equities

• Foreign developed markets posted good returns in June, lifting the Q2 results.  Japan has performed well in the first half of 2023, offsetting to a degree the limited exposure to dominant technology and consumer stocks in MSCI EAFE which has caused the index to the lag the S&P 500 YTD.
• Though China had favorable returns in June, the sharp declines earlier in Q2 negatively impacted MSCI EM Equity returns for the quarter.  The index lagged developed markets for the quarter and YTD. 

Fixed Income Markets

• Small increases in interest rates across the yield curve modestly hurt bond market returns in May and June, leading to mixed results for the quarter.  Below investment grade sectors performed better, benefiting from their higher correlation to equity markets and increased bond issuance.

Specialty Markets

• Both REITs and Commodities delivered strong returns in June.  Natural Gas prices rose steadily in June, lifting the broader index while oil prices were flat. 

US Equity Sectors

• All sectors were positive in June, with the growth oriented Consumer Discretionary and more economically sensitive Materials and Industrials sectors topping the table.  For the quarter Technology, Consumer Discretionary and Communication Services were the top three sectors.

July 14, 2023

Dear Valued Investor,

As we finalize the log on the first six months of 2023, we believe there’s value in reflecting on recent months gone by. Doing so can help crystallize key learnings and help chart a course through the rest of the year. Looking back on the first half of 2023, it’s probably fair to say the outcome has been a bit better-than-expected for the stock and bond markets, especially compared to 2022’s tumult.

So, what major points have we learned through the first half of the year?

1. Inflation’s path is not endlessly higher. The return to some post-COVID-19 supply/demand normalcy and an ease in input costs have helped push the inflation rate down—which has helped both stock and bond markets bounce back.
2. Still-strong consumer spending and a stubbornly tight jobs market have helped the U.S. avert a recession…so far. The Federal Reserve continued to raise interest rates, but we believe they may begin reducing rates as early as Q4 2023 or Q1 2024.
3. Bonds look like bonds again. After enduring a generational period of weakness in 2022, bonds are back and should be considered important ballasts in a multi-asset portfolio.

Given what we have noted so far, we can now focus on the second half of the year. We’ve seen improvement in the bond market and positive returns, and believe there are still plenty of opportunities for both capital appreciation and attractive income generation—assuming both inflation and interest rates continue to glide lower, as we believe they will. For income-oriented investors, the bond market could offer an opportunity that has not existed in over 15 years.

Turning to stocks…the market has already put in some notable gains for the year. With recession risks still looming, investors may consider being less aggressive with their portfolios than they were the first half of the year. This doesn’t means stocks cannot go up from here, but rather that the risk/reward equation in stocks and bonds looks evenly balanced.

The key issue here is recession. We have already seen a push lower in corporate earnings expectations. Some weakening in manufacturing and services indicators, and early signs that the consumer could be slowing down, point to the likelihood of a mild recession to come. This view is reinforced by the expectation that the jobs market could weaken modestly through the end of this year.

Overall, the opportunities in the second half of the year may not be as robust as in the first half. However, after a bumpy 2022, investors should be encouraged that wading back into the market could bear some fruit in the coming months. In fact, the difficulty we witnessed last year likely helps lay the groundwork for further market stabilization as we press ahead. Despite our mild recession outlook, we believe there are still definitive investment prospects to uncover.

Please reach out to me if you have any questions.

Scott Krase