Second Quarter 2023 - Market Talk
Equities continued to climb in Q2 2023. The Nasdaq was the standout yet again, up +12.8% in the 2nd Quarter (+32% YTD). Shares of the S&P 500 gained +8.3% (+16.9% YTD) and the Dow Jones Industrial Average rose +3.4% (+4.9% YTD). See graph below:
What were some of the more powerful tailwinds to stock prices this quarter? An increase in soft-landing expectations, better than expected Q1 earnings and guidance from companies (albeit helped by expectations that were a “low- bar”), easing regional bank stress, and lastly, a continuation of the generative-AI secular growth theme. One might argue that the Federal Reserve’s decision to keep the benchmark interest rate unchanged in June (targeting 5.0 – 5.25%) was also helpful to equity prices. On the contrary, although the Fed may have paused, both they and central banks around the world have been relentless in their messaging of a ‘higher for longer’ rate path.
Chairman Powell himself noted the likelihood of at least two more rates hikes this year and this seemed to put downward pressure on asset prices during the quarter. Indeed, parsing the events of the quarter, we are growing increasingly cautious as we enter the second half of 2023. Although the catalogue of economic data has been strong, extended valuations imply that the bar for what qualifies as ‘strong’ has been raised.
Will we see a recession in 2023? Academics and investors have a poor track record when it comes to correctly answering macro-economic questions of this nature.
Those who do not foresee a recession argue that:
Consumer confidence is at a 17- month high.
Inflation is in fact falling -- maybe not to 2%, but well below 8%. The trend is our friend.
Unemployment is close to all-time lows at 3.7% and GDP is 2%. There are 1.7 job openings for every unemployed person
Those who do foresee a recession are quick to point to the fact that:
Inflation is a far more legitimate problem than investors appreciate. As a result, even if global economies begin to weaken, central banks will be reticent to start cutting rates.
Credit is much more expensive, the effect of which is to dampen consumers’ ability to pull forward demand and create growth. Moreover, tighter credit conditions take time to work their way through the economy and increased regional bank regulation – a result of the Silicon Valley Bank and First Republic Bank fallout – is still to come. See graph below:
