Mid-Year Market Update

Now that we have reached the mid-point of 2023, it’s time to review where markets stand. The headlines only a few months ago were negative, as several economic data points were weakening and the turmoil in the US banking system had yet to run its course.

Despite the negative backdrop, the US economy vis a vis the consumer has proved much more resilient than most strategists forecast. And price action in S&P 500 appears to be confirming this, as the closely followed US stock market benchmark was recently able to break above last August’s high of 4325. As such, many market strategists now seem convinced that the bear market in stocks is over and markets are ready for a glide path back to new highs. However, we remain skeptical it will be that easy as we believe there is still work to be done. Our reasoning is that the economy is likely to weaken further, as leading economic indicators and the bond yield curve continue to suggest further weakness ahead (our base case remains that a US recession will develop early next year). Yet, we do believe odds are increasing that the equity market lows in both the US and Canada are in, and any pullbacks are likely contained and should be buyable.

At the same time bear markets can be very tricky to maneuver. For example, much of the recent market strength has been very one-sided in technology stocks, with the top 10 largest heavyweights (Apple, Microsoft, Google, Meta, etc.) accounting for ~89% of the ~14% YTD gains for the S&P 500. We would be more convinced that the market move is sustainable with a broadening out of breadth (more stocks participating in the advance), especially in the areas that have lagged such as dividend stocks, small-cap stocks and the equal-weighted S&P index. Ideally, rotation needs to continue to occur as Technology cools off and other areas catch up. In any event, the S&P 500 is very overbought currently (gone up too much too fast), and a period of consolidation could transpire in the coming weeks and months. In that potential range-bound, choppy environment, we would refrain from chasing rallies and use the drawdown periods as opportunity.

Inflation coming down but still too hot…

From a macro perspective, the economic calendar was relatively light over the last week, but contained crucial inflation data, which likely keeps the Federal Reserve data dependent on the path forward. The Fed, which announced to not raise interest rates at its meeting last Wednesday continues to get more cover for a “pause” given the strong labor market (despite some increase in initial jobless claims last week) and moderating inflation. However, as the Fed signaled during the FOMC meeting, its job is not yet done on inflation and further rate hikes may be necessary if inflation doesn’t cool 2 more. Despite inflation off its peak levels, inflation is still elevated with the latest reading for core CPI coming in at 5.3% YoY and headline CPI at 4% YoY, which suggests that the Fed still has work to do to return inflation towards its goal of 2%. Inflation has been a challenge for the Fed since COVID and Chairman Jay Powell has stated that they will need to raise rates further in order to get core CPI below 4% by year-end. As such, the path of the Fed and inflation will continue to be key macro inputs to market sentiment for equities.

In summary, we endorsed the widespread view that 2023 would be a year of two halves; we simply thought the herd had its halves backwards and the first half would be good for risk assets while the second half, along with early 2024, would be bad for them. We are prepared to change our stance if the data begin to suggest that we should, but we have not yet seen enough evidence to upend our view that consumption will grow at a rate that keeps the expansion going for the rest of the year. After reconsidering each of the ways households can fund consumption – assets, income and/or borrowing – we think that US consumers have the wherewithal to stave off the recession until the first half of 2024.

Source: Michael Gibbs – Raymond James Investment Management. Your unique circumstances and risk tolerance are key factors in the ongoing management of your portfolio. To discuss how this or other financial opinions may affect your investments please contact us.

Sincerely,
Latta Wealth Management