Last year at this time, we were in the early stages of a bear market, as the S&P 500 Index had declined over 20% from its record high in January 2022. The market continued to ebb and flow for the remainder of the year, reaching its low point in October, before finishing the year down 18%. Rising interest rates to combat increasingly high inflation along with concerns about a global recession were the primary drivers.
As of press, June 22, the S&P 500 Index is up 14% since year-end. Inflation has come down significantly over the past many months, having peaked at 9.1% in June 2022 and most recently coming in at 4.05%. Corporate earnings have been strong, and the U.S. economy has once again proved resilient. After two consecutive quarters of negative GDP to begin 2022, the U.S economy has rebounded nicely. Strong consumer spending, solid corporate balance sheets, and continued strength in the labor markets will potentially keep a more serious economic downturn at bay.
However, volatility remains, and the strength in the market has been narrow through the first half of 2023. The performance of seven large capitalization companies (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla) has dominated the overall performance of the S&P 500 Index. In fact, through May, only 15% of S&P 500 companies outperformed the return of the total index, and if the aforementioned seven companies were to be removed from the index, the performance would have been negative as opposed to up nearly 10%. Increased participation by other S&P 500 companies would go a long way toward adding credibility to the recovery and increasing investor confidence.
Volatility persists in the fixed-income markets as well, as the yield curve remains inverted and short-term rates continue to rise with each rate increase by the Federal Reserve Bank (Fed). Fixed-income securities maturing beyond three years are at similar levels to where they were at the beginning of the year and are still below their shorter-term counterparts. The Fed has now increased rates by 500 basis points (5%), and while recent comments indicate that more hikes might be necessary, most think we are nearing the end of this rate-hiking cycle.
This year has not been without its surprises, as concerns about a widespread regional banking crisis surfaced and political headbutting surrounding the eventual passing of an increased debt ceiling have kept everyone on their heels and investors nervous about the near-term direction of the market.
As we head into the second half of 2023, many of the same questions we had entering the year remain: Will the Fed be successful in bringing inflation down to or near its target of 2%? Are we nearing the end of this Fed rate-hike cycle? Will the strength of the job market and thus the strength of the consumer remain healthy? Will corporate earnings continue to be strong? In summary, will the U.S economy remain resilient enough to avoid a more serious downturn or even recession?
While none of us has the answer to any of these questions, I turn to Warren Buffet and his comments about America in his most recent annual shareholder letter:
“I have yet to see a time when it made sense to make a long-term bet against America. And I doubt very much that any reader of this letter will have a different experience in the future,” he wrote in the letter. “We count on the American Tailwind and, though it has been becalmed from time to time, its propelling force has always returned.”
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