With over half the year in the rearview mirror, we reflect on the major market drivers and what to anticipate to close out the year. For additional information and looking through charts, we turn to our partners at JP Morgan with their “Economic & Market Update”. The article explores ten talking points that are on the minds of investors today.
Economy: The US economy is hovering near its long-term average of 2% growth in GDP. The return to trend pushes out the thoughts of recession for the remainder of 2023. Major contributors to the steady growth are continued demand from consumers, decreasing inflationary pressures, and a resilient job market. Consumer demand makes up nearly two-thirds of domestic GDP, and the average American continues to spend to keep the economy rolling forward.
Recession: It is unlikely that the US will dip into recession for this year. Nearly all leading indicators point toward muted economic growth – with the operative word being growth. A slowing or muted economy does not mean one that is retracting, but rather one that is along a steady path. Look to consumer demands, and deglobalization to keep the US moving forward.
Inflation: Inflation reached its highest point in the recent cycle during the Summer of 2022. At a peak of over 9%, inflation gobbled up headlines and forced the Fed’s hand to raise interest rates. Inflation has moderated and continued a downward trend for several months. Recently the rate has bounced from a bottom of 3%, back to 3.2%. Inflation is still higher than the Fed’s desire to maintain a 2% inflation rate, but lower than its long-term average of 3.28%.
Job Market: The unemployment rate is near all-time lows, as the US copes with an excess of labor demand. Currently the unemployment rate sits at 3.5%, it would be difficult to imagine a deep recession until these figures exceed 5%. Ask most business owners today and they would say that “good help is hard to find”. Finding the dream job may be challenging, but work is available and plentiful for those seeking it.
Fed & Interest Rates: The Fed’s job to maintain low inflation has been tested over the past 18 months. The base interest rate has risen from close to zero to currently at 5.5%. Their stated goal is to decrease demand, and thus far the moderating effect on the economy is well documented. The Fed has promised to maintain a hawkish stance until inflation is sufficiently out of the system. Additional increases are still on the table for this year and rate cuts are not expected until 2024.
Stocks/Equity: The story of the year has been in concentration. The “Magnificent Seven” large tech stocks are responsible for the lion’s share of the S&P 500’s growth as of this writing. The index currently sits around 4400, with a targeted year end forecast of 4200 – 4800. The range in the forecast suggests multiple paths to close the year. The end of Q2 earning season is coming to a close with the majority of companies reporting earnings close to expectations. Broadly speaking, stocks are still available for purchase at a discount relative to 2022 highs, but investors are being rewarded by being selective. The market will have to broaden to achieve the high range of the year end targets.
Bonds: Fixed income suffered one of the worst years on record in 2022. That’s bad news for existing bondholders and those needing to sell under duress. On balance, it’s provided a rare opportunity to purchase into bonds at a discount and allow portfolios to rely on fixed income to drive a portion of the strategy. Bond buyers have seen the most opportunity available in short-term and high-quality investments. Over the coming months, we anticipate that the opportunity will begin to shift into a normalizing yield curve. The existing short-term bond investments will be complimented by medium-term bonds in the near future.
So what does it all mean? Investing continues to be a complex blend of art and science. That is as true today as it has ever been. Many of the headwinds that forced negative headlines throughout the past 18 months are dissipating. Both the stock and bond markets have shown signs of resiliency and recovery in 2023. That said, there will be additional challenges to face in the future. Our balanced approach seeks to find a compromise between protecting against the storms of tomorrow while being opportunistic to find ways to help our clients meet their individual needs.
In closing, we want to express a heartfelt thank you. If this letter landed in front of you, we know that you’ve entrusted us with a portion of your financial lives. This responsibility is one that we take seriously and look forward to serving you in the many years to come.
Garrett & the Team at Katahdin Financial Group