July 2023 Market Commentary

During the second quarter, the S&P 500 officially moved into ‘bull market’ territory having come up off its October 2022 lows +20%.  The move…

During the second quarter, the S&P 500 officially moved into ‘bull market’ territory having come up off its October 2022 lows +20%.  The move surprised many investors as the market has taken nearly eight months to make this recovery despite the seemingly unending negative views.  Although still volatile and uncertain at times, the market has clearly set a new uptrend since bottoming in October and has been technically sound in the process.  

As of the June meeting, the Federal Reserve decided to “skip” another rate increase at this time but kept the door open for potential future increases. Over the past 18 months, the Fed has made significant progress in reducing inflation by rapidly raising rates. This has resulted in a decline of the year-over-year inflation data, with CPI dropping from a peak of 9.06% to 4.05%, and PCE (the Fed’s preferred inflation measure) decreasing from 6.98% to 4.36%. Furthermore, PPI, often seen as a leading indicator for CPI, has fallen from a peak of 11.66% to 1.09% on a year-on-year basis.

Two inflationary factors, largely still intact, that we will continue watching are housing costs (home prices and rents costs) and wage inflation which has been moderate yet persistent. These two factors could make overall inflation ‘sticky’ and much more difficult to battle.   

Despite the substantial increase in borrowing costs, the US economy has remained resilient, with GDP staying positive and Gross Domestic Income (GDI) hovering near an all-time high.  This strength in GDI supports the notion of a robust US consumer which will help to buoy the economy.

Additional factors that support our cautiously optimistic outlook for the second half of this year:

There are significant assets “parked” in money market funds; approximately $6 trillion.  It is probable that that this money will eventually flow back into US equities, which could drive consumption and the markets higher.

Employment data showcases the remarkable resilience of the US economy, with near-record high job openings contributing to sustained low unemployment rates.  We think it’s possible the Fed may be working to reduce the number of job openings (JOLTs) rather than increasing the unemployment rate as traditionally is the case.  Such a move would signal a potential easing of business spending while minimizing the impact on those currently employed.

The effectiveness of trade policies continues to be evident.  Import data from China in April reveals a 25.9% decline compared to the same period a year ago.  China, previously the largest exporter to the US, has fallen to the third position, trailing behind Mexico and Canada. This shift can be attributed to the USMCA Agreement, which replaced NAFTA and was passed into law in 2020.

Goldman Sachs recently lowered the probability of a recession within the next 12 months from 35% to 25%.  Additionally, year-end expectations for the S&P 500 were raised to 4,500, representing a 17% gain for the year.

In conclusion, maintaining a focus on quality and defensive investments has proven to be rewarding over the long term and has been revalidated during this most recent bear market.  Data consistently demonstrates that when one invests in well capitalized and consistently performing companies, investor portfolios will be positively impacted by this steady investment strategy.

Thomas A. Toth, Senior
Kenneth Bowen, II
President & CEO