- July 5, 2023
-- Key Takeaways:
Last week closed the books on the first half of 2023. The headliner: it was a strong start. Though gains so far may have flown somewhat under the radar for some investors as the scars of 2022 may not yet have fully healed. At the midway point last year, stocks were down 20% and bonds had lost 10%, on their way to full year returns of -18% and -13%, respectively.
Fortunately, the first half of 2023 has been more rewarding, helped by a more favorable outlook for Fed policy and inflation as well as a surprisingly resilient economy. Overall market gains have been healthy, but trends playing out under the surface highlight unique drivers of that performance, a balance of risk and opportunity, as well as the value of a diversified strategy. Here are a few perspectives on first half moves and what they signal for what may lay ahead in the second half.A positive, but not totally smooth, ride
Key themes: less Fed, more growth
- Stocks jumped out to a solid start, continuing the rally that began off of last October's bear-market lows. Moves in equities this year have been predominantly driven by expectations for Fed rate hikes, so January's rally was dashed first by an exceptionally strong jobs report in early February (reigniting fears of persistent inflation and more Fed tightening) and then additionally by the bank crisis in March, culminating in an 8% pullback in the S&P 500. From there, however, the rally has resumed, powered by expectations for an approaching end to the Fed's rate-hiking campaign. The U.S. stock market is now up roughly 23% since mid-October, recouping a sizable portion of last year's bear market drop.
The economy has defied gravity…for now.
- Performance so far has been defined by relief on the rising-rate front. This has filtered through equities by way of a strong rebound in technology and growth investments, which were punished last year. This was evident in the divergence in performance between the tech-heavy Nasdaq and the Dow.
Strong starts are a good sign.
- The latest reading on first-quarter GDP was released last week, showing the economy grew by a better-than-expected 2% to start the year, powered primarily by a jump in personal consumption. The health of the economy has benefitted from a strength in household services and discretionary spending, with the resiliency of the consumer directly traced to the strength of the labor market, which remained on display in the first half of the year.
- Strong first halves are often a good sign. Since 1990, the stock market gained more than 10% in the first half in ten of those years. The market rose further in the second half every one of those years.