2023 Mid-Year Thoughts on the Market
The first four months of 2023 delivered plenty of volatility and rotation, but by the time the dust settled, market participants seemed to be taking things in stride. The failures of Silicon Valley Bank and Signature Bank created a burst of fear and raised the threat of widespread bank runs, but coordinated action by the Federal Reserve, the US Treasury, and the FDIC soon dampened anxiety. Similarly in Switzerland, the collapse of Credit Suisse was met with quick action from regulators, resulting in the bank’s acquisition by UBS.
For the year so far, many indexes advanced, but it was US growth stocks that set a blistering pace. In a reversal of fortunes from 2022, growth stocks bested their value counterparts by a wide margin. Technology and communication services companies dominated the leaderboards, including many of the bellwether companies that struggled in 2022.
As we move towards the summer, the stock and bond market seem to be focused on different things. The bond market reflects concerns that the Fed may have gone too far and higher rates and tighter lending conditions may impact future growth. The equity market seems more upbeat about the economy’s momentum and the benefits of lower longer-term rates on valuations. In addition to the quick action in response to the bank failures, the Fed’s decision to raise short-term interest rates by 25 basis points in May have left investors with a growing expectation of a pause in tightening with an increased speculation for rate cuts in the second half of 2023. Global manufacturing is also moving in a favorable direction, supported by China’s economic reopening and trends in Europe.
Although it has been a welcomed sign to see markets positive to start the year, our near-term outlook remains cautious. When looking at the S&P 500’s rally this year, about 90% of it’s return can be attributed to just 20 companies and our belief is that more broad participation is needed in order for the index to move much higher from here. We also believe that while the Fed seems likely to pause rate hikes, we do not think that rate cuts will occur later this year and that a “higher for longer” regime is a more likely course of action.
With this being said, our view is we are nearing the final act of this market cycle. In the near term, markets will continue to experience bouts of volatility, however, opportunities do exist across asset classes, and we are poised to take advantage of those as we see them. If you’d like to learn more, please check out Raymond James’ Investment Strategy Committee report found here including a primer on the upcoming debt ceiling debate.
The opinions expressed are those of Christopher Vidler and Eric Van Der Hyde as of the date stated and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Options are not necessarily those of Raymond James.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. Diversification and strategic asset allocation do not assure profit or protect against loss.
The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.
