Home Personal Finance 2023 Mid-Year Market Outlook: Out of the Woods?

2023 Mid-Year Market Outlook: Out of the Woods?

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Most of what was expected to happen in the first half of this year actually happened. Inflation has eased, US economic growth has slowed, the Federal Reserve appears to be nearing the end of its rate hike cycle, and the US government’s debt ceiling is in a stalemate. A potential default was resolved before.

One thing we didn’t expect was the overall strength of the stock market. We thought the stock market could face rough waters in the first half and clear ups in the second half.In fact, the S&P500® As of June 14, the index is up more than 13% year-to-date.thMeanwhile, the Nasdaq Composite rose more than 30%, an unexpectedly strong performance albeit driven by a handful of mega-cap stocks.

Fixed income market returns were positive across almost all asset classes, from short-term Treasuries to high-yield corporate bonds, through early June, and we generally expect more similar returns in the second half of the year. We still think international stocks are attractive, supported by more attractive valuations and rapid earnings growth, but a surge in artificial intelligence (AI) stocks could boost relative U.S. stocks further I also recognize that there is

So are we out of the woods yet? No, the US stock market is linked to continued uncertainty about Fed policy, weak corporate earnings, possibly bubbled investor sentiment, and the risk of a “rolling” recession affecting various regions and industries. and may still experience volatility or weakness. You’re going to be in deep recession. Get an overview of our current thinking, with links to more detailed reports.

US Stocks and Economy: Mixed Inside

While overall equity index performance has been relatively strong year-to-date, performance below the surface is more reflective of ongoing macro uncertainties such as:

1. Weak leading indicators. The Conference Board’s Leading Economic Index (LEI), which has historically had a solid track record of leading the top and bottom of the economy, is down nearly 10% from its peak 16 months ago.

2. Institute for Supply Management (ISM) prices suggest lower inflation. Manufacturing prices are on the decline. Service prices are trending downward, but have not yet contracted. The good news is that this bodes well for the direction of inflation, but he has two problems. First, the decline in ISM service prices has yet to translate into a similar decline in the core services inflation indicator (which the Fed monitors closely as it adjusts its anti-inflation policy). Second, a significant drop in both ISM price components could historically coincide with a recession.

3. There are cracks in the labor market. Getting inflation back into the bottle without a commensurate rise in unemployment has been the goal throughout the Fed’s rate hike cycle. We continue to find it difficult to achieve. For example, the job-seeking rate, which shows how many previously unemployed people are now able to find work, has fallen to its lowest level since September 2021. If this rate continues to fall and unemployment claims rise, we expect the cracks in the labor market to widen and slow (if not negative) employment growth.

4. A credit crunch may be imminent. Lending standards are tightening, which is affecting corporate earnings, arguably the most important direct fundamental underpinning the stock market. After about three quarters of lag so far, the tight lending environment suggests further downside to earnings for the S&P 500.

5. The market rise needs to be further expanded. Stock market performance in the first half was “top heavy”, with some large-cap stocks leading the rally. It is not uncommon for large caps to dominate the performance of market capitalization weighted indices such as the S&P 500 and Nasdaq, but concentration risk increases when the majority of constituents underperform the overall index. Recently, there are signs that the bull market is starting to expand. At the end of May, only 15% of the S&P 500 had outperformed the overall index over the past three months, but as of June 9, that number had improved to 24%.th. Continued improvement would bode well for the market.

6. Soaring AI stocks could be a bubble. Launched in late 2022, ChatGPT, an artificially intelligent chatbot, has surpassed 100 million users in just two months. AI can have a huge impact not only on how we live and work, but also on productivity and perhaps long-term inflation (or disinflation) trends. The problem is that the timing of all this is uncertain, even if enthusiasm is certainly growing.

7. Investor sentiment could bubble. One of the emerging risks heading into the second half is investor sentiment. We investigate a myriad of both behavioral and attitudinal sentiment indicators, including the NDR Crowd Sentiment Survey, which integrates seven different sentiment indicators. Right now, the stock market is in the best zone (based on history). The problem is that the surge of optimism can become excessive, making the outlook even more volatile or weaker. We would like to keep an eye on the situation of sentiment toward the second half.

Fixed Income: The more things change, the more…

Surprisingly, despite the high volatility in the bond market in the first half of the year, there was not much change. While short-term yields have risen on the back of the Fed’s tightening policy, yields on US Treasuries with maturities of three years or more have remained virtually unchanged since the beginning of the year.

The Fed kept interest rates unchanged at its policy meeting in June, but hinted at the possibility of another rate hike later this year. In other words, a rise in short-term interest rates is still a concern. However, we still expect yields on US Treasury bonds, which mature in two years or more, to continue to fall as the factors that initially pushed Treasuries lower – tightening monetary and fiscal policies – continue. The yield curve is likely to remain inverted until there is a signal that the Fed will move to accommodative policy.

After more than a year of tightening policy, risks to growth and inflation appear skewed to the downside, as the economy responds to changes in Fed policy late. Moreover, fiscal policy has turned from a positive to a negative factor for the economy. The fiscal impulse, which measures the contribution of fiscal policy to gross domestic product (GDP) growth, turned slightly negative after a surge during the pandemic.

Global Stocks and Economies: The Cardboard Box Recession

The second half of the year may be less dramatic, but moderater returns for investors, due to what we call the ‘cardboard box recession’. In a typical global recession, all sectors of the economy suffer. But for much of the past year, the economic pain has been concentrated in manufacturing and shipping, sectors where products and services tend to include boxes. Demand for corrugated linerboard (from which most corrugated boxes are made) is declining, consistent with the pattern seen during previous recessions dating back to 1997.1 By contrast, the service industry, which accounts for the largest share of output in the developed world, continues to grow. The Global Purchasing Managers Service Business Activity Index remains well above 50, the line between contraction and growth.2

The tech-driven narrow progress in the US stock market contrasts with the broader performance of international equities. Equal-weighted indices represent an “average” stock, with each stock having the same weight. Equal-Weighted MSCI EAFE Index of International Equities Gains Well Over 20% from End-October 2022 to June 13, 2022 (U.S. Dollar Equivalents)th, will meet the technical definition of a new bull market in 2023. But the equally-weighted S&P 500 index is up just 5% over the same period. In general, the more stocks that contribute to the overall market boost, the more supportive the market. Global equities averages continue to outperform U.S. equities, providing broad support for the bull market in global equities.

We remain neutral on the performance of emerging market equities this year, but they appear to remain dependent on the US-China tensions as well as the continued economic recovery in China (MSCI Emerging Markets Index Recall that Chinese stocks are the most heavily weighted (30%). Geopolitical tensions appear to have had little impact on China’s domestically-led economic growth, but appear to be weighing on Chinese stocks. China’s stock market fell after the small-balloon controversy erupted in early February, despite a strong, better-than-expected economic performance. The recession has disrupted a three-month recovery of 60% that existed from the end of October to its year-to-date peak on January 27.th.

With the U.S. debt ceiling deal in place until early 2025, global central banks moving toward a moratorium on interest rates, banking stresses stabilizing, and signs of easing potential U.S.-China tensions, the 2023 There may be fewer surprises in the second half. Global equity market dominance, suspended in May, could resume in the second half of this year, but equities face headwinds if weakness spills over to the services sector as inflation and job growth both slow there’s a possibility that.

1 Source: Fiber Box Association, as of June 2, 2023.

2 The global PMI services business activity index rose above 55 in May, according to S&P Global.

The information provided herein is for general informational purposes only and should not be considered individual recommendations or individual investment advice. The investment strategies described here are not suitable for everyone. Each investor should consider its own particular investment strategy before making any investment decision.

All statements of opinion are subject to change without notice as market conditions change. The data from third-party providers contained herein is obtained from what we consider to be reliable sources. However, we cannot guarantee its accuracy, completeness or reliability. Documentation supporting claims or statistical information is available upon request.

The examples provided are for illustrative purposes only and are not intended to reflect the results that can be expected to be achieved.

Forecasts contained herein are for illustrative purposes only, may be based on our own research, and are developed through analysis of historical public data.

Policy analysis provided by Charles Schwab & Co., Inc. does not, and should not be construed as, an endorsement of any political party.

The information provided herein is for general informational purposes only and is not intended to replace specific tax, legal or investment planning advice. Please consult a qualified tax advisor, certified public accountant, financial planner, or investment manager if specific advice is needed or appropriate.

Investing involves risks such as loss of principal.

Past performance is no guarantee of future results and the opinions presented should not be viewed as indicators of future performance.

All company names and market data above are for illustrative purposes only and are not intended as a recommendation, offer to sell or solicitation of an offer to buy any securities.

A diversification strategy does not guarantee profits or prevent losses in a declining market.

The index is unmanaged, incurs no management fees, costs or expenses, and cannot be invested directly. For more information, visit schwab.com/indexdefinitions.

Bonds may experience increased loss of principal during periods of rising interest rates. Fixed income investments are subject to various other risks, including changes in credit quality, market valuations, liquidity, prepayments, early redemptions, corporate events, tax implications and other factors. Lower rated securities have greater credit, default and liquidity risk.

International investments are subject to additional risks, including differences in financial accounting standards, exchange rate fluctuations, geopolitical risks, foreign taxes and regulations, and potential illiquid markets. Investing in emerging markets can accentuate these risks.


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