During the first half of 2023, the broad stock market indexes regained most, but not all, of the losses experienced in calendar 2022. The first half of 2023 saw a reversal of these trends. Nearly all the 16.9% return thus far this year has come from a small number of the S&P 500’s largest positions, mostly in technology. According to the Wall Street Journal, the 50 stocks in the S&P 500 that fell the most in 2022 lost 31% on average. These same stocks have rebounded 56% thus far in 2023. Equally telling as to the narrowness of the market’s advance is the fact that the gain in the equal-weighted S&P 500 index for the first half of the year was a modest 7.0%.
The rebound in higher risk equities has not been a function of a definitive change in Federal Reserve policy. After raising rates early in the year, the Fed “passed” on raising rates at their early June meeting. Subsequent job and wage growth data has convinced the Fed that further rate increases will be necessary to slow the economy and reduce inflation.
While the Fed remains primarily concerned with the employment and wage growth figures, there are numerous data points signaling a softening economy. The recent monthly inflation figures were the lowest in two years, and the dollar is hitting fifteen-month lows. A broad measure of commodity prices fell 7.8% over 2023’s first half, while crude oil and natural gas prices are down 12% and 37% respectively on the year. Commercial real estate properties are projected by McKinsey & Company to fall over $800 billion in value in the coming years as working from home becomes further entrenched.
One meaningful impact of the continued rate hikes is providing investors—for the first time since the 2008 financial crisis—a reasonable return on lower risk assets. Earlier this month the yield on the two-year Treasury note rose above 5% for the first time in nearly two decades. This allows investors an acceptable alternative to equities that will help mitigate overall portfolio volatility in the times ahead.
With the financial markets uncertain as to if the future holds further inflation/higher interest rates or a slowing economy/lower rates, we are following a conservative path that doesn’t require being right on the economy and rates. Between the higher yields on cash and near-cash, along with the steady growth in dividends within our equity positions, we expect portfolio investment income to increase for the year.
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