I hope you are doing well and enjoying your summer. With Q2 2023 in the books, below is an overview of the markets, the economy, and other key themes that dominated the last three months.
Monthly Themes
Entering the second half of the year, here is a recap of monthly themes in Q2:
- Major U.S. stock indexes traded lower in April as markets braced for additional interest rate hikes; overall prices consolidated in then-recent monthly ranges.
- May saw technology break out of recent trading ranges, with the Nasdaq surging.
- Then there was June, when the rally started to broaden, featuring a breakout by the broad-based stock index, the S&P 500.
S&P 500: Make It Three Consecutive Positive Quarters
Let’s make it three for the S&P! The second quarter of 2023 was the third consecutive positive quarter for the S&P 500 and the Dow Jones Industrial Average. The Nasdaq 100 was the biggest gainer of the three major indexes in the second quarter, with Artificial Intelligence stocks and large-cap tech fueling gains.
For the second quarter of 2023, the S&P 500 increased by 8.30%, the Nasdaq 100 rose by a whopping 15.16%, and the Dow Jones Industrial Average saw an uptick of 3.41%.
Economy
Investors shook off the banking turmoil that was front and center in the first quarter.
A Federal Reserve-induced recession is still a possibility, as interest rates remain elevated, and tightening credit conditions are making their way through the markets. However, that did not come to pass in the second quarter, as major U.S. stock indexes traded positively.
Inflation
Inflation metrics continued to decline in the second quarter, with the last Consumer Price Index data showing monthly consumer pricing declining in May from April levels.
Year-over-year, inflation slowed to a 4.0% rise. In comparison, the year-over-year metric just a few months ago was 6.0%. That’s an impressive decline. We expect CPI to continue to fall to 3.2% over the next couple of months due to higher monthly readings from 2022 that will fall off the year-over-year readings.
Core CPI (which removes food and energy) remains firm, potentially backing the Fed’s case for additional rate hikes. U.S. equities loved seeing headline inflation metrics tick lower throughout the second quarter, however.
Labor Market
Strength persisted in labor markets throughout the second quarter, with solid payroll gains (253,000 in April and 339,000 in May), both numbers beating analyst consensus expectations. This is an indication of newly created jobs added that didn’t exist prior, a signal of economic strength.
In April, the unemployment rate tied for the lowest level since 1969, at 3.4% vs. 3.6% estimates. For May, the unemployment rate rose to 3.7%, higher than the estimate of 3.5%. Perhaps this was a factor in the Fed not raising rates in June.
As inflation readings decline, it is natural to expect some slowing in the labor market, according to conventional wisdom. As of the second quarter, the labor markets remain steady overall. America’s labor shortage is real.
Quarterly Federal Reserve (Fed) Actions
The second quarter featured a 25-basis-point hike in May and no hike at the June meeting, with the Fed taking a breather after ten consecutive rate hikes.
The third quarter brings two Fed meetings: July 26th and September 30th. The Fed has indicated two more hikes for 2023, and many analysts seem to agree. The July meeting may bring one of those hikes.
Putting Q2 Together
Active participants are currently debating whether the market is getting ahead of itself, given some of the macroeconomic headwinds. But these same folks more than likely missed this recent stock market rally. This is a big reason to be a long-term investor: timing the market is very difficult, and many get left behind.
Remaining focused on the long term allows an investor to avoid getting caught up in quickly changing narratives that could trigger emotional decisions.
With that said, if second-quarter market developments are on your mind, or if there is anything else I can help with, please do not hesitate to reach out!
Take Care,
Andrew Fairman, CFA, CFP®
Chief Investment Officer