In our quarterly Economic & Market Update Newsletter, we separate the relevant from the noise, to bring you timely content that helps you on the path to and through retirement!
July Commentary & 2nd Quarter 2023 Recap
Stock Market Update
Stocks continued to climb a wall of worry in the first half of 2023. The S&P 500 was up nearly 16% this year at the close of the second quarter. The Dow Jones Industrial Average climbed 3.8% this year, despite soft economic data, prominent bank failures, fears about the debt ceiling, and continued worries about an imminent recession.
Economic Update
For the last six quarters, economists have been predicting a recession, but where is it? Economic growth is tepid but continues to surprise on the upside. With inflation subsiding and jobs still in abundance, the economy might do what many (including us) thought was impossible – achieve a “soft landing” where rising interest rates bring down inflation and slow economic growth without dragging the U.S. into a full-blown recession.
Despite continued uncertainty about the direction of the economy, we are encouraged by the fact stocks have rallied 27% off the lows since last October – technically signaling a new bull market.
Several other positive drivers for stocks are underway:
- It’s possible that the Fed is close to the end of its rate tightening cycle. Historically, when the Fed is done raising rates the stock market rallies 10% over the next 6 months.
- Even if the economy continues to soften, stocks tend to rally far in advance of the economy bottoming.
- Investor sentiment has been very negative – down 17 straight months, which is usually a good contrarian indicator for stocks
- Corporate profits appear to be accelerating again.
Lastly, and perhaps most importantly for the long-term, the tech-heavy Nasdaq is booming thanks to tremendous excitement about artificial intelligence. Obviously, there are concerns and risks, but the potential for productivity gains will change how we live, work, and interact with each other.
Bond Market Update
Coming off the worst calendar year for bonds ever in 2022, things are also looking much brighter in the bond market. The Morningstar US Core Bond Index gained 2.4% in the first half of 2023.
We expect that the Fed will keep rates higher for longer to ensure inflation returns to target levels.
Investment Considerations
We continue to believe that dividend growth stocks should serve as the core stock holdings in client portfolios, particularly for clients approaching or currently in retirement. Developed international stocks appear to be undervalued, so we’ve been increasing client allocations to international stock holdings in 2023, where appropriate.
With the likelihood of higher rates for longer, short-term bond instruments like money market funds, certificates of deposit, and investment-grade corporate bonds remain a core holding in client portfolios, providing higher yields with low credit risk and low duration risk.
The Bottom Line…
Stocks have climbed a wall of worry this year and have rallied 27% off their lows since last October. We now believe the Fed is nearly done raising rates. If the Fed can achieve a soft landing, bonds and stocks look poised to continue to perform well in the second half of 2023.
