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2023 Market Commentary

July 20, 2023


2023 Second Quarter

The global economy grew at a slower pace in the second quarter of 2023, as rising inflation and interest rates weighed on growth. The United States economy grew at an annualized rate of 1.3% in the second quarter, below the 2.0% growth rate in the first quarter14. The eurozone economy grew at an annualized rate of 0.2% in the second quarter, the slowest pace of growth since 202014.  China's economy grew at an annualized rate of 4.0% in the second quarter, the slowest pace of growth since 202114.  Inflation remained elevated in the second quarter, with the Consumer Price Index (CPI) in the United States rising 4.9% year-over-year in June6. Central banks around the world are expected to continue raising interest rates to combat inflation. The Federal Reserve did not raise the federal funds rate for the first time after 10 consecutive rate hikes12.  

Third and Fourth Quarter Market Outlook

The future market outlook for 2023 is uncertain, but there are a few key factors that could shape the markets. Several risks could weigh on growth, including rising inflation, and the potential for a recession in the United States. However, there are also some positive signs, such as easing inflationary pressure, strong employment numbers, and positive corporate earnings. The pace of economic growth in the second half of 2023 will depend on how well these risks are managed. Inflation is currently at a 40-year high, and it is expected to remain elevated in 20236. This could lead to higher interest rates, which would weigh on economic growth and stock prices. The Federal Reserve is expected to raise interest rates in July by .25 bps and then pause to combat inflation12. Continued rate hikes could lead to slower economic growth and lower stock prices. Corporate earnings have proven strong even as economic growth slows. This is due to many factors, including strong demand, rising prices, and cost savings. Investor sentiment could continue to improve if inflation continues to moderate, and the global economy shows signs of stabilization15.


                                     Pease, A. (n.d.). 2023 market outlook – Q3 update: Russell Investments. 2023 Market Outlook – Q3 update | Russell Investments. https://russellinvestments.com/us/global-market-outlook#ColorBoxesRoot_b8fda17e-a2a8-4716-be82-0e57bee24097

2023 Market Overview

The U.S. economy is facing some headwinds in 2023, including rising inflation, slowing growth, and a widening trade deficit. However, the labor market remains strong, and the Federal Reserve is taking steps to address inflation. It remains to be seen how these factors will play out in the coming months.

The market has been volatile in 2023, with several sharp selloffs. However, it has also rallied on several occasions, as investors have become more optimistic about the economic outlook. Inflation has been a major concern for investors in 2023. However, there have been some signs that inflation is starting to come under control. In June, the Consumer Price Index (CPI) rose 4.9%6 year over year. The Federal Reserve has been raising interest rates to combat inflation. However, there are concerns that the Fed may raise rates too quickly, which could lead to a recession.

Real GDP growth: The U.S. economy grew at an annual rate of 2.0% in the first quarter of 2023, down from 2.6% in the fourth quarter of 202214. The Federal Reserve projects that GDP growth will slow to 1.2% in 2023 and 1.9% in 202412.  

Labor market: The U.S. labor market is strong, with the unemployment rate at 3.6%13 in June 2023. Real average hourly earnings have surpassed the rate of inflation after two years in negative territory.

Trade: The U.S. trade deficit widened in the first quarter of 2023, as imports rose faster than exports. This is due in part to the strong demand for goods in the U.S. economy along with the strong US dollar.

Financial Markets: Stock markets have been volatile in recent months, as investors have become more concerned about the possibility of a recession. The S&P 500 index is up 19.11%10 year-to-date. The S&P 500 “closed 2.47 standard deviations above its 50-DMA, which was the most extreme overbought reading for the index since July 2021.” 7 (Subin, Samantha).  The Nasdaq Composite is up 38.19% 11year-to-date, the Dow Jones Industrial Average is up 5.48%9  year-to-date and the Russell 2000 is up 12.87%8 year-to-date.

Inflation: Inflation has been a major concern for businesses and consumers in 2023. The Consumer Price Index (CPI) in the United States rose 4.9%6 year-over-year in June, the highest level in 40 years. This was driven by rising prices for food, energy, and shelter. Central banks around the world are raising interest rates to combat inflation. The Federal Reserve has raised interest rates by .75 BPS in 202312, and it is expected to continue raising rates in the coming months.

Effect of Rising Interest Rates on the Stock Market: The first effect of rising interest rates on the stock market is that higher debt costs squeeze corporate profits while a falling corporate profit will drag on stock prices. Rising interest rates dim the economic growth and health of the company as future returns may be skewed. Rising interest rates have a negative impact on the present value of a business. This is due to interest rates being known as the discount rate upon future cash flows, a higher discount rate will intrinsically lower the value of a business. Warren Buffet once stated that “the most important item over time in valuation is obviously interest rates. If interest rates are nothing, values can be almost infinite. If interest rates are extremely high, that's a huge gravitational pull on values” 3(Header)

Overall, the market is looking strong for the remainder of 2023. There are some positive signs, such as the slowing of inflation. However, there are also some risks, such as the possibility of a recession. Here are some additional factors that could affect the market in the coming months: the pace of economic growth in the United States and other major economies, and the direction of interest rates. There are factors that could support the markets, including strong corporate earnings and attractive valuations. Investors should carefully consider the risks and rewards before making any investment decisions. Some specific sectors that could perform well in Q3 and Q4 of 2023: Materials and Healthcare. Materials stocks could benefit from rising commodity prices and healthcare stocks are often seen as defensive investments, which could make them attractive in a volatile market.

 

                                                                                       Despirito, T. (2023, June 21). Taking stock: Q3 2023 equity market outlook. BlackRock. https://www.blackrock.com/us/individual/insights/taking-stock-quarterly-outlook

 

 

Important Information

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed.  There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

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Cited Information

  1. Despirito, T. (2023, June 21). Taking stock: Q3 2023 equity market outlook. BlackRock. https://www.blackrock.com/us/individual/insights/taking-stock-quarterly-outlook
  2. Pease, A. (n.d.). 2023 market outlook – Q3 update: Russell Investments. 2023 Market Outlook – Q3 update | Russell Investments. https://russellinvestments.com/us/global-market-outlook#ColorBoxesRoot_b8fda17e-a2a8-4716-be82-0e57bee24097
  3. (2023, July 7). How do rising interest rates affect the stock market?. Nasdaq. https://www.nasdaq.com/articles/how-do-rising-interest-rates-affect-the-stock-market
  4. Mena, B. (2023, April 27). The US economy grew at a much slower pace in the first quarter | CNN business. CNN. https://www.cnn.com/2023/04/27/economy/q1-us-gdp-economy/index.html
  5. Kasman, B. (2023, July 11). Mid-year market outlook 2023. https://www.jpmorgan.com/insights/research-mid-year-outlook
  6. Cox, J. (2023, July 13). Inflation rose just 0.2% in June, less than expected as consumers get a break from price increases. CNBC. https://www.cnbc.com/2023/07/12/inflation-rose-just-0point2percent-in-june-less-than-expected-as-consumers-get-a-break-from-price-increases.html
  7. Subin, S. (2023, June 11). S&P 500 closes slightly lower on Monday after touching highest level since August: Live updates. CNBC. https://www.cnbc.com/2023/06/04/stock-market-today-live-updates.html
  8. (n.d.). Russell 2000 index price, real-time quote & news. Google Finance. https://www.google.com/finance/quote/RUT:INDEXRUSSELL
  9. (n.d.-a). Dow Jones industrial average price, real-time quote & news. Google Finance. https://www.google.com/finance/quote/.DJI:INDEXDJX?window=YTD
  10. (n.d.-c). S&P 500 price, real-time quote & news. Google Finance. https://www.google.com/finance/quote/.INX:INDEXSP?window=YTD
  11. (n.d.-b). Nasdaq composite price, real-time quote & news. Google Finance. https://www.google.com/finance/quote/.IXIC:INDEXNASDAQ?window=YTD
  12. March 22, 2023: FOMC projections materials, accessible version. The Fed - March 22, 2023: FOMC Projections materials, accessible version. (n.d.). https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20230322.htm
  13. Bureau of Labor Statistics. (n.d.). The employment situation - June 2023 - U.S. Bureau of Labor Statistics. Bureau of Labor Statistics. https://www.bls.gov/news.release/pdf/empsit.pdf
  14. Cox, J. (2023a, June 29). First-quarter economic growth was actually 2%, up from 1.3% first reported in major GDP revision. CNBC. https://www.cnbc.com/2023/06/29/first-quarter-economic-growth-was-actually-2percent-up-from-1point3percent-first-reported-in-major-gdp-revision.html
  15. US investor sentiment, % bullish (I:USISBNW). US Investor Sentiment, % Bullish. (n.d.). https://ycharts.com/indicators/us_investor_sentiment_bullish
  16. Irwin, N. (2023, July 12). Wages are finally rising faster than inflation - Axios. Axios . https://www.axios.com/2023/07/12/real-wage-gains-inflation