CWG Investment Committee: Bullish First Half of 2023. Now What?

%POST_TITLE% Thumbnail

Stock indexes roared back to life in the first six months of 2023 after dismal 2022 performances. The S&P 500 gained 15.9%, the Nasdaq exploded 31.7%, Russell 2000 added 7.2%, while the Dow Jones increased just 3.8%. The U.S. bond market also had a solid showing, rising 2.2% through June.  

Investor sentiment has swung from downright bearish at the start of this year to optimistic as the market has proven its ability to climb despite rising short-term rates and declining earnings forecasts.  

The possibility of recession still looms over the U.S. and global economies with an inverted yield curve, weak commodity prices, and slowing GDP in the next two quarters, according to the consensus economic forecast provided by FactSet.  

Stocks led by a select number of big cap technology names have strongly rallied for 2 quarters in a row. This narrow cadre of big cap names, dubbed the "Magnificent Seven" by Wall Street mavens, have led the charge with big gains pulling up the big cap indices. The seven stocks are Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla.  

This narrow market move has been seen in the past, most notably with the "Nifty Fifty" in the 1960's. That did not end well with a 1966 top that led to a 16-year sideways market until 1982.  

Our market, however, is beginning to broaden with more stocks rising and playing catch up.  

Consumer spending has held strong, bottlenecks have nearly vanished, and unemployment stays near record lows of 3.5%.  

The forward P/E ratio is now 19x earnings, up from 16x last October, which was in line with the average of the last 20 years, according to Goldman Sachs.  

It is easy to envision the equity rally stalling out in the second half of the year with expensive valuations, tepid profit growth, and attractive alternatives in fixed income markets.  

The market forecast is an 87% probability that the Fed funds rate will climb another 25 basis points at their July meeting after a pause in June, according to the CME FedWatch Tool. Short term T-bills yield 5.4% out to 1 year.  

Inflation is still over 2x the Fed target and most economists still forecast at least a mild two-quarter decline in GDP starting very soon. Recent economic data in the U.S. and Europe reveals a struggling manufacturing environment with recession levels of activity.    

Recession has yet to arrive on our shores, and commodity prices have cooled along with inflation. The average consumer still has to cope with cumulative higher prices, up 9% in 2022, plus 4% this year. This means households are stretched and the middle class has spent its COVID windfall.  

The resumption of student loan payments will also put a crimp on spending overall starting later in 2023.  

Europe dodged a bullet this past winter with adequate energy supplies given help from warm weather and good planning, despite the war between Russia and Ukraine.  

Japan has remained stable with the loosest monetary policy on the planet.  

China is struggling but not cracking yet. Their government appears to be engaging in tit for tat tariffs and boycotts of certain U.S. goods.  

Artificial intelligence has caught investors’ attention as the catalyst for future growth and rising productivity. Companies that supply A.I. tools, such as NVDA, have risen to new highs.

We are still 8% below the 2021 all-time highs for the SPX. We expect a few more bumps on the way back up.  

Our portfolios are positioned to gain from high short-term rates and using bullish buffered stock strategies along with a classic diversification of assets.  

We hope you all enjoyed your 4th of July celebrations!