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Economic and Market Update

Economic and Market Update

October 27, 2023

As we enter the second half of 2023, we wanted to provide a few thoughts on the economy and markets. After a strong start to the year, stocks shrugged off bank woes, debt ceiling gridlock, and recession jitters to turn out a powerful Q2 performance.1

The U.S. stock market and economy both outperformed expectations in 1H23. The S&P 500 gained more than 15%, boosted by the biggest Tech/Growth stocks as the Nasdaq 100 recorded its strongest first half return since 1989. In the credit market, the riskiest corporate bonds outperformed as investors collected bigger interest payments. While soft data (i.e., ISM & regional Fed surveys, sentiment, etc.) and other leading indicators point to an economic slowdown, the hard data continues to outperform expectations and indicate the economy is still expanding. GDP grew at a +2% annualized pace in the first quarter, durable goods new orders remained strong, and companies added ~300,000 jobs in both April and May. Toss in excitement around artificial intelligence and the Fed's injection of $300 billion into the banking sector during March's regional bank stress, and the stock market brushed off the impact of higher interest rates.

The question heading into 2H23 is if the economy will start to feel the cumulative effect of the Fed's aggressive tightening, and when we might start to see signs of any slowing. While the lag time is variable, prior Fed tightening cycles suggest the economy should feel the impact of higher interest rates ~9-12 months after the first rate hike. We are 15 months into the most aggressive tightening cycle in decades, and the hard data remains resilient. However, this isn't a typical tightening cycle due to the large amount of monetary stimulus introduced during the pandemic, and the heavy fiscal stimulus added shortly thereafter by the CHIPS Act, the Infrastructure Investment and Jobs Act, and the Inflation Reduction Act. Compared to previous tightening cycles, the flood of stimulus is slowing and delaying the transmission of monetary policy into the real economy. This makes it very difficult to know (1) what impact the Fed's previous rate hikes will have on the economy and (2) if, or when, the impact will be felt.

Meanwhile, investors are growing impatient as they wait for the 'most-anticipated' recession. Some are wondering if the bear market is over, or if we will see more volatility ahead. Let's take a look at what happened in Q2 and what might be in store for Q3.

So, how’s the economy doing?

Inflation continues its downward spiral.

The latest data for June shows that inflation fell for the 12th month in a row to an annual rate of 3%.1 That's a significant improvement from June of last year when inflation soared to 9.1%.

It also puts the Federal Reserve in the difficult position of deciding whether or not to raise rates again after pausing in June. The odds are good that the Fed will hike rates again at least once more this year, though if inflation continues to decline, policymakers might choose to hold off.2

The economy continues to shrug off recession worries.

Despite concerns about how rising interest rates could eat away at economic growth, it doesn't look like a recession is imminent but, that could change of course. However, a July 10 Federal Reserve model projects that the economy grew 2.3% in Q2.3

The job market is still robust, even in sectors sensitive to high interest rates.4

All told, the economy has added 1.67 million jobs in 2023 so far.5 That's significantly less than the 2.67 million jobs added in the first half of 2022 but it shows that the labor market still has legs. However, job growth may be cooling in the private sector, which could be a warning sign of a slowing economy.6

Market psychology has been trending toward optimism.7

The stock market generally tends to reflect expectations about the economy and business performance. While economic data seems to support the optimistic view, pullbacks and corrections are likely, even if we're already in the early stages of a bull market.

Here's some good news: They happen pretty regularly, as the chart below shows.8

You can see by the red dots that even years with strong market performance experienced some pretty big drops. That's normal and not a reason to worry.

So, what happens next in markets?

At Wright Wealth, we’re watching the data, staying flexible, and looking for opportunities. We remain focused on investor's overall financial strategy to insure portfolios are in line with them. We continue to lean into the diversification of asset class, size, and investment style along with the disciplines of risk management and rebalancing to take advantage of the market opportunities that emerge.

Questions about markets or your portfolio? Please reach out. We'd be happy to chat.

P.S. Want to know more about fear and greed investing theory? Here’s a handy explainer put together by CNN.

P.P.S. How’s your summer going? Anything exciting going on in your world? Will you hit "reply" and let me know?

Sources

1. https://edition.cnn.com/2023/07/12/economy/cpi-inflation-june/index.html

2. https://www.cnbc.com/2023/07/05/fed-minutes-july-2023-.html

3. https://www.atlantafed.org/cqer/research/gdpnow

4. https://www.cnbc.com/2023/07/07/heres-where-the-jobs-are-for-june-2023-in-one-chart.html

5. https://fred.stlouisfed.org/series/PAYEMS

6. https://finance.yahoo.com/news/hidden-recession-red-flag-hidden-100000573.html

7. https://edition.cnn.com/markets/fear-and-greed

8. https://am.jpmorgan.com/content/dam/jpm-am-aem/global/en/insights/market-insights/guide-to-the-markets/mi-guide-to-the-markets-us.pdf

Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.

This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.

Risk Disclosure: Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Past performance does not guarantee future results.

This material is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security. The content is developed from sources believed to be providing accurate information; no warranty, expressed or implied, is made regarding accuracy, adequacy, completeness, legality, reliability, or usefulness of any information. Consult your financial professional before making any investment decision. For illustrative use only.


Wright Wealth LLC is an Investment Advisor registered with the State(s) of Georgia All views, expressions, and opinions included in this communication are subject to change. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services. Any information provided has been obtained from sources considered reliable, but we do not guarantee the accuracy, or the completeness of, any description of securities, markets or developments mentioned. We may, from time to time, have a position in the securities mentioned and may execute transactions that may not be consistent with this communication's conclusions. Please contact us at 470-607-0441 if there is any change in your financial situation, needs, goals or objectives, or if you wish to initiate any restrictions on the management of the account or modify existing restrictions. Additionally, we recommend you compare any account reports from Wright Wealth with the account statements from your Custodian. Please notify us if you do not receive statements from your Custodian on at least a quarterly basis. Our current disclosure brochure, Form ADV Part 2, is available for your review upon request, and on our website, www.wrightwealthllc.com. This disclosure brochure, or a summary of material changes made, is also provided to our clients on an annual basis.