Summary: What’s impacting the markets?
The first half of 2023 provided investors with a much-needed market rebound. Consumer sentiment is trending upward, and unemployment, at 3.6%, remains well below long-term averages (1). GDP grew by 2.4% in the second quarter, beating market estimates of 1.8%, an indication that consumption remains strong regardless of higher interest rates (2). Globally, the long-awaited Ukrainian counter-offensive executed in June fell dramatically short of reaching the front lines (3). Biden signed the Fiscal Responsibility Act of 2023, expanding the debt ceiling in exchange for capped federal spending programs through 2025. Correspondingly, Fitch Ratings, one of the world’s top credit rating agencies, downgraded the US government’s credit rating from AAA to AA+ quoting “the erosion of governance over the last two decades that has manifested in repeated debt limit standoffs and last-minute resolutions” (4).
Equity Markets:
The S&P 500 continued to gain steam in Q2 of 2023, completing its third straight quarter of gains – though the dispersion between gains was significant. Seven mega cap U.S. companies have accounted for 70% of the S&P 500 gains YTD (2). While money markets continue to offer attractive yields and cash holdings reached near-record highs in Q1, many investors found themselves sitting on the sideline through the equity market rebound (5). This presents a considerable challenge to investors who chose to sell and hold cash: determining the correct time to re-enter the market.
Inflation:
Inflation news has finally turned more positive. After peaking at over 9% in June of 2022, headline inflation eased to 3% year-over-year in June 2023, while core inflation (CPI excluding food and gas) remains above average at 4.83% (2). The fed’s aggressive rate hikes eased in Q2, perhaps signaling we are nearing the end of this rate cycle.
Inverted Yield Curve:
Despite the shift in optimism, treasury markets continue to signal a recession, pushing the 3-month treasury yield well above the 10-year treasury yield. This inversion is illustrated by the spread falling below the red line. Historically, there have been eight inversions since 1960 and each instance ultimately led to a recession (highlighted with grey bars). As interest rate hikes produce delayed effects on the economy, the average time from inversion to recession is 15 months. Despite the warning signal, many economists have lowered estimated probabilities of a recession – suggesting a potential soft landing.
Sources:
(1) https://ycharts.com/indicators/us_consumer_sentiment_index
(2) FS Investments, Q3 2023 Economic Outlook Sailing into the slowdown
(3) https://www.vox.com/23819064/ukraine-war-counteroffensive-russia-mines-tanks
(4) https://www.fitchratings.com/research/sovereigns/fitch-downgrades-united-states-long-term-ratings-to-aa-from-aaa-outlook-stable-01-08-2023
(5) https://cnbc.com/2023/01/18/investors-are-holding-near-record-levels-of-cash-and-may-be-poised-to-snap-up-stocks.html
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