TIMELY FINANCIAL NEWS
Mid-Year Update and Outlook
Leslie Thompson CFA ® , CPA, CDFA™ Editor and Chief Investment Officer Co-Founder
The most popular prediction headed into 2023 was that markets would suffer through a rough first half but rally by year’s end. However, stocks and bonds have refused to comply with the consensus forecast. Throughout the first five months of the year, the S&P 500 Index returned 9.65% (including dividends), and the Bloomberg U.S. Aggregate Bond Index returned 2.46% on a total return basis. Positive returns are a welcome relief following last year’s market woes. Areas of the market that performed well last year (Energy and Staples) are this year’s laggards, and the outperformers of this year (Technology and Communications) were deeply out of favor last year after two years of solid gains. While the market-cap-weighted S&P 500 has performed well, the broader U.S. market, as measured by the Invesco S&P 500 Equal Weighted Index ETF (RSP), is down 4.33% through the end of May. The dichotomy between the handful of mega-cap growth companies (Apple, Microsoft, Google, Tesla, and Nivida) and the rest of the market helps to build the proverbial wall of worry. Interestingly,
Apple and Microsoft are valued at almost double the combined market capitalizations of the entire Energy and Materials sectors. 1 Apple is worth more than the Russell 2000 Index, and J.P. Morgan is worth more than all publicly traded regional banks. 2 Plenty of bad news this year could have derailed the first half’s rally in risk assets. Further tightening monetary policy, the Federal Reserve has raised interest rates at all three of its meetings this year and ten times overall since last March. As a result, the economy shows signs of cooling, but inflation is still too hot. Year-over-year earnings have declined for two consecutive quarters on smaller revenues and shrinking profit margins. Several U.S. banks have failed amid the ongoing crisis in the regional banking industry, raising fears of a looming credit crunch. Debt ceiling negotiations in D.C. were particularly divisive before resulting in a deal to avoid default. China’s reopening from COVID restrictions has been underwhelming. Sadly, the Russia-Ukraine war rages on with no clear end.
4 PERSPECTIVE Summer 2023
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