I hope everyone is in the middle of an enjoyable summer.  One where you might be vacationing more hopefully and not checking in on the markets as much.  So let us welcome in the 3rd quarter and second half of 2023 with open arms, wide eyes, and a laser sharp focus.  Identifying the start and stop of a bull market is always challenging as the art of forecasting includes intimate knowledge of past markets, empirical data, and an abundance of timely analytics to increase the probability of accuracy in forecasting.

As we close the books 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 is probably fair to say the outcome has been a bit better-than-expected for the stock and bond markets, especially compared to the difficult landscape we tripped through in 2022.  Maybe, just maybe, we have seen the return of the 60/40 investor with some reprieve expected in the future with lower inflation expectations.  We believe this may provide an opportunity for some fixed income investors.

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 the stock and bond markets to 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 but more likely in early 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 have 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.

Turning to stocks…the bull market that began back in October of 2022 is now 9 months old and has already put in some notable gains. However, with recession risks still looming, investors may consider being less aggressive with their portfolios than they were the first half of the year.  Valuations remain attractive but early in 2023 investors seeing through the darkest of clouds knowing recovery would occur rewarded investors and a constructive market uptrend ensued.

The S&P 500 is up +16% at the mid-year point and the Nasdaq posted its best first half gaining +38%. Again, in our view, the stock market bottomed October 12th, 2022 and the rise over the past 9 months is the start of a new bull market. I know this sounds counterintuitive since we had no “recession” nor “Fed cutting rates” yet, but we have had a huge decline in inflation, and as we argued for most of 2022, the inflation war is the war the Fed is waging and seemingly winning. This view is supported in that our belief of headline inflation continuing to fall closer to 3%, S&P500 Earnings growth coming in higher than expected, Fed reserve and market participant sentiment towards inflation expectations turning dovish, and finally the 5+ trillion dollars in cash on the side lines having fully missed the market recovery beginning to be allocated to equities.

I am frequently asked, “Is this a buy dip market?”  My answer is simple when a market uptrend is intact, “if buy the dip means dollar cost averaging and buying the market systematically, then yes, buy the dip.”  If you are reading between the lines here, do not time the market, that is a difficult task and often the largest of rally’s are missed.  At current levels, the risk/reward equation in stocks and bonds looks more evenly balanced vs earlier in the year.

We have seen a push lower in corporate earnings expectations, what if those expectations are too bearish? We also have seen some weakening in manufacturing and services indicators, and early signs that the consumer could be slowing down.  This does point to the likelihood of a mild recession in past markets. This view is also 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, but, after a very 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.  Stay Safe and Stay the course.


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