Weekly Market Commentary
July 3, 2023
Showing remarkable resilience.
Throughout the first half of 2023, the U.S. economy and financial markets proved to be resilient – and so did investors. U.S. stock markets moved higher amid enthusiasm for artificial intelligence and expectations that the Federal Reserve’s tightening cycle might be near an end. The Standard & Poor’s 500 Index entered a bull market and the Nasdaq Composite Index delivered its best first-half performance in 40 years, gaining more than 30 percent over the period, reported Barron’s.
So far this year, many investors have remained optimistic amid significant uncertainty that included:
· A banking crisis and tighter credit. In March, three U.S. regional banks failed, creating concern about the health of mid-sized banks. While the situation has stabilized, banks have become more cautious about lending, making it more challenging for businesses and individuals to find funding, reported Nicole Goodkind of CNNBusiness.
· Debt-ceiling turmoil. Before Congress passed legislation raising the debt ceiling, some pundits were predicting a calamitous outcome for financial markets, featuring falling stock prices and rapidly rising bond yields. Fortunately, Congress reached an agreement, and we didn’t need to find out.
· A rate-cycle-expectations gap. During the first six months of this year, the bond market expected the Federal Reserve (Fed) to pivot and begin lowering rates during the second half of the year, reported John Authers of Bloomberg. However, in late June, Fed Chair Jerome Powell stated the Fed was likely to raise rates two or more times during 2023.
· Stubbornly high inflation. Prices are rising more slowly; however, inflation is still well above the Fed’s two percent target. Last week, the Personal Consumption Expenditures (PCE) Price Index showed headline inflation was 3.8 percent year-over-year, while core inflation, which excludes food and energy, was 4.6 percent.
· Mixed economic messages. The post-pandemic economy has been full of surprises. The economy has generally been stronger than many anticipated, although some parts of the economy suffered. “The U.S. is experiencing a ‘rolling recession’ that may be followed by a ‘rolling expansion’ as the parts of the economy that weakened first start to recover,” according to a source cited by Lauren Foster of Barron’s. One example is the single-family housing market, which fell into recession as borrowing costs rose and has begun to improve.
· A new bull market. In June, the Standard & Poor’s 500 Index reached a bull-market marker. The Index was 20 percent higher than its previous low, which occurred in October 2022. Initially, gains were driven by a relatively small number of stocks; however, a broader swath of stocks gained as the month progressed, reported Jack Pitcher of The Wall Street Journal.
It's likely that uncertainty and volatility will continue. Last week, major U.S. stock indices finished higher, reported Barron’s Data.11 Yields on most U.S. Treasuries finished the week higher.