As we finalize the log 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’s probably fair to say the outcome has been a bit better-than-expected for the stock and bond markets, especially compared to 2022’s downturn.
So, what major points have we learned through the first half of the year?
- Inflation’s path is not endlessly higher. The return to some post-COVID-19 supply/demand normalcy and ease in input costs have helped push the inflation rate lower—which may have helped both stock and bond markets bounce back.
- 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 or Q1 2024.
- Bonds look like bonds again. After enduring the largest drop in bond values in 200 years during 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’ve 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.
The key issue here is a recession. We have already seen a push lower in corporate earnings expectations. Some weakening in manufacturing and services indicators, and early signs that the consumer could be slowing down, point to the likelihood of a mild recession to come. This view is 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. However, after a 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 our office if you have any questions.
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This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
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All index data from FactSet.
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