Mid-Year Market Analysis

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Many analysts sounded the bells earlier this year about an imminent recession looming. Active investors who buy and sell investments strategically to make profits on temporary shifts in the value of stocks might have been frustrated if they acted on the advice of pundits. That’s because market timers may have missed out on the surprising gains in the second quarter of 2023.

From April through June, all sectors of the market did well, but larger company stocks performed the best. The Wilshire 5000 Total Market Index, the broadest measure of U.S. stocks, had a gain of approximately 9% in Q2, bringing total Year-to-Date (YTD) gains to 16.3% for the first half of 2023.[i] Large Cap stocks, as measured by the S&P 500 Index, gained about 8.3% in Q2 and were up 16.4% YTD.[ii]

Small Cap stocks, or companies with a market capitalization of $250 million to 2 billion, had a gain of 5.1% in Q2, and 9.4% by mid-year, as measured by the Wilshire U.S. Small-Cap Index.[iii] The tech-heavy Nasdaq Composite Index which posted the largest losses in 2022 came roaring back in 2023, recording a gain of 31.8% by the end of June.[iv]

International investments did surprisingly well by mid-year also. In the first quarter of 2023, the Eurozone reported they were in a technical recession, meaning by metrics alone (ignoring other considerations such as consumer sentiment, unemployment, etc.), the region had two consecutive quarters of negative Gross Domestic Product (GDP). Much of this was attributable to higher energy prices and inflation problems.[v] However, by the end of the second quarter in 2023, the EAFE Index which measures developed foreign economies posted a surprising gain of 9.7%.  Emerging Market stocks of less developed countries, as represented by the EAFE EM Index, gained 3.46% in dollars, during the same 6-month window.[vi]

The alternative components of a diversified portfolio, real estate, commodities and utilities, also performed interestingly in 2023. While real estate suffered losses in 2022 due to uncertainty about Covid work-from-home policies, the Wilshire U.S. REIT Index posted a 6.7% gain in the first quarter of 2023.  On the other, hand, safe havens of 2022 such as commodities and utilities posted losses in 2023 of -11.4%[vii] and -7.2%[viii] as of the end of Q2.

Bond interest rates continue to be inverted, meaning shorter term bonds are paying a higher return than longer term bonds. Intuitively, if you are committing your money to a longer investment term, you expect to be paid more for your longer commitment. However, in an inverted yield curve, you can actually get a higher return on a shorter investment term.  Currently, the 30-year U.S. government bond is yielding 3.9%. 5-year government securities are yielding 4.2%, and 1-year government bonds are yielding an attractive 5.4%![ix] However, stay cautious. An inverted yield curve typically indicates that investors are predicting uncertainty in the market ahead.

Naturally our mid-year check in leads us to ponder what the remainder of 2023 may hold. The Federal Open Market Committee (FOMC) which has raised the Fed Funds Rate aggressively and consistently since 2022 to combat inflation and slow the economy took its first pause in interest rate hikes in June 2023, which the stock market loved. While Fed Chairman Jerome Powell vocalized that more interest rates may come in 2023, the break indicated we are at, or near, the end of monetary tightening. That could be promising for the stock market for the remainder of 2023.

Further, some of the inflationary issues related to supply chain disruption and low interest rates (which drove high consumer spending) have been resolved. In June of 2022, U.S. inflation peaked at 9%. Today, inflation has lowered to 4%, thankfully.[x] Under Fed Chairman Jerome Powell, interest rates have risen sharply in the last 18 months, slowing consumption. The ISM Purchasing Managers Index which measures the American manufacturing sector noted decreased production in 2023 domestically. Overseas, export orders for manufacturing firms have also fallen since the end of 2022. While the slower demand is good news for inflation, the consequential lower revenue is bad news for firms’ bottom lines. Many corporations have adjusted by lowering their revenue projections and managing investor expectations for the remainder of the year.

Stepping back, the economy is doing quite well overall. The unemployment rate in the U.S. remains around 3.5% and the labor participation rate for workers aged 25 to 54 has remained strong at 83%, the highest level since 2007. Additionally, American households have sufficient cash savings which helps to support strong consumer confidence, overall. We cannot predict the future and perhaps the last three years of volatility have reminded us of the power of diversification. No one could have foreseen the once in a lifetime Covid pandemic, and following three years of volatility. If an investor jumped in and out of our recent stock market, they probably lost a lot of sleep or gained more grey hairs. Historically, the market has been efficient, and the rebounds following losses have rewarded disciplined investors of diversified portfolios. If your portfolio has not performed the way you’ve expected, now may be a good time to reevaluate your investments. Reach out to your Certified Financial Planner™ or CPA with a Personal Financial Specialist credential. It’s never too late to get on track for a sound investment future. 

[i] https://www.wilshire.com/solutions/indexes

[ii] https://www.spglobal.com/spdji/en/indices/equity/sp-500/#overview

[iii] https://fred.stlouisfed.org/series/WILLSMLCAP

[iv] https://www.nasdaq.com/market-activity/indexes

[v] https://m.economictimes.com/news/international/business/eurozone-in-recession-at-start-of-2023/articleshow/100848910.cms#:~:text=Synopsis,largest%20economy%20and%20surging%20inflation.

[vi] https://www.msci.com/real-time-index-data-search

[vii] https://www.spglobal.com/spdji/en/index-family/commodities/broad/#overview

[viii] https://www.spglobal.com/spdji/en/indices/equity/sp-500-utilities-sector/#overview

[ix] http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

[x] https://www.usinflationcalculator.com/inflation/current-inflation-rates/

The commentary on this website reflects the personal opinions, viewpoints and analyses of Kondo Wealth Advisors, Inc. employees providing such comments, and should not be regarded as a description of advisory services provided by Kondo Wealth Advisors, Inc. or performance returns of any Kondo Wealth Advisors, Inc.  Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Kondo Wealth Advisors, Inc. manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.