Review
Looking back to our beginning of the year outlook, we commented that only four times in the almost 100-year existence of the S&P 500 has the index been down two or more years in a row. Thus, it is no surprise to us that the S&P rose 16% to end the first half of 2023. A combination of a resilient US economy and foreseen ending of the Federal Reserve interest rate hikes was enough for the market to take a more “risk on” approach as well as a dramatic shift from value to growth stocks. The shift to growth from value is easily demonstrated with the NASDAQ, a more tech heavy index, rising 32% for the first half, while the Dow Jones Industrial Average, a more value-oriented index, up only 4% in the same timeframe.
Outlook
Our guidance at the beginning of the year suggested a volatile first half of 2023 with a second half reverting to a more normalized market. Thus far, the US consumer and economy have proved resilient to the rapid increases in interest rate hikes and the volatility we predicted was decidedly to the upside. In our opinion, the Federal Reserve will increase rates one or two more times this year and then end their tightening stance. As the economic and consumer data continue to show positive signs, we believe the US avoiding a recession is a likely scenario. Although we believe the worst is far behind us, based on the first half performance in the equity markets, we would not be surprised if there was a short-term pullback that leads to potential new highs towards the end of the year. With the end of the tightening cycle in view, the bond market is now attractive and should produce both positive returns as well as higher income.
Equities
With the outperformance of equities so far in 2023, the markets have become slightly overvalued. We would not be surprised to see a short-term pullback in the 3rd quarter that leads us to potential new highs towards the end of the year. Any pullback absent of deteriorating economic conditions will be used as an opportunity to increase stock holdings.
Fixed Income
Fixed income is becoming increasingly attractive as we get towards the end of the Fed’s interest rate hikes. A pause in hikes will allow bond prices to stabilize and yields are now at attractive levels vs dividends on equities. This space should hold up well versus any volatility in equities during 2023.
Alternatives
Our commodities position was an outperformer in 2022 as this is historically one of the best performing sectors in an inflationary environment. We continue to monitor and may look to reduce this position based on declining inflation.
As always, I stress that in this ever-changing political and economic environment, sensible diversification is the key to weathering market uncertainties.
Jason M. Vavra, CPA, PFS
Email: jvavra@vcm-wealth.com Website: www.vcm-wealth.com Twitter: @VavCap
Disclaimer
The information contained herein is not considered an offer to buy or sell any securities referred to herein. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. There is no guarantee that the figures or opinions forecasted in this report will be realized or achieved. Past performance is no guarantee of future results.
