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Q2 Market Perspective: Bears, Bulls, Inflation, Rolling Expansion

Posted on Monday, July 17, 2023

Summary video: click here to view (4 minutes)


It’s only July, and Texas temps are already well into triple digits, thanks, in part, to current El Niño conditions. First observed in the 1600s by fishermen, El Niño (or, the related La Niña) weather cycles recur about every two to seven years, but there’s no predicting the timing or intensity. Markets also follow patterns which are notoriously impossible to predict and offer a range of possible outcomes. Given challenging headlines surrounding regional banks, debt ceiling drama, continued Ukraine conflict, interest rates, and recession, many are surprised by the current bull market. Yet, here we are again, with equity markets on the rebound since October, delivering gains for three consecutive quarters. We are not in the ‘surprised’ camp–not because we have a crystal ball–but because we recognize that markets, in aggregate, know more than us, and they are leading indicators, moving ahead of anticipated outcomes. We recognize that even if a recession officially hits, markets may already have priced it in.


Consider this headline from July 6th, which sums up the tone of the last 18 months: “Stocks Post Broad Losses After Strong Economic Data.” Shouldn’t strong employment be a good thing? Since when is good news actually bad? Ultimately, this headline reinforces (unintentionally) the notion that markets move before data is released. The cycle repeats, also in the inverse. Negative data, but a positive market day! This phenomenon helps explain why prognostication is perilous, while a disciplined process with a portfolio linked to a plan can reward investors over time. Although it has not been an easy 18 months (or 3 years, for that matter), those who stuck with their plan were rewarded with a 22.25% increase in the S&P 500® since October 1, 2022 along with positive bond returns.


As promised each quarter, take a look at key data points around our core themes: inflation, the Fed, the Dollar, and Bears and Bulls.


Market increases over three straight quarters usher in a new bull market by the textbook definition of a 20% gain.



The bear market, currently in the rear view, was the longest since 1948, and the recovery broadened to close Q2. Eight companies drove the growth through May, and it increased to 20 companies through June. Small companies posted a 7% increase in the first two weeks of June as well. Note that since 1950, once we’ve entered a new bull market, the following 12 months have been positive 92% of the time. Last point - this reminds us that diversification allows us to own the winners. Imagine the impact to your return, if you didn’t own any of those 20 companies?


GDP (Gross Domestic Product) for Q2 is estimated at 2.2%, as of July 1st. However, with a mirror image of 2022 - the GDI(Gross Domestic Income) is down. As we stated last year, does this mean recession? No. The Bureau of Economic analysis calls a period of time a ‘recession’ if output decreases two quarters in a row. We must look at GDP, GDI, and employment, not one in a silo. Rolling recession is a new term being used, which implies certain sectors and industries trip and fall, but as a whole, the economy stays on course. To me, this is a glass half empty term - it should be a rolling expansion, because it also implies there is not a broad macro economic recession.


With more inflation progress (reduction to 3% in total last month), The Fed’s monetary policy is officially tight, achieving their goal. The money supply decreased for the first time in nearly a century, the producer price index decreased in May, and the headline consumer price index remains well off its peak and at the 3.68% longer term average. With the Fed Funds rate greater than inflation and a shrinking money supply, it’s clear the Fed accomplished its initial goal of a tight policy without major disruption to broader employment. We still have work to do. But, don’t look now, a large portion of the inflation jump may have actually been transitory.


US debt to GDP declined to 118%, continuing the downward trend. U.S. government debt peaked at 129% of GDP during the pandemic, so good progress has been made in reducing the debt. For comparison purposes, it took 18 years from the last peak in debt to GDP coming out of WWII to revert back to the pre-war level. This is a steamship headed in the right direction, and one which actually benefits from a little inflation, so maintain patience.


The dollar is off to its “weakest” start since 2018, but remains unquestionably the world’s reserve currency. We’ve noted in recent commentaries that ‘weak’ does not equal bad. A weaker dollar means better opportunity to export, which is a boost to GDP. Lastly, weak does not mean reserve currency is at risk. Over 60% of reserve is held in the U.S. dollar. The euro is second at roughly 15%. The Renminbi (FYI that’s the international Chinese currency reserve name, not the Yuan) is less than 5%. Still less than the pound.


There is always a tug-of-war in the global economy; all signs never point in the same direction. There are always tailwinds and headwinds. Right now, certain leading indicators such as the ISM manufacturing index still show contraction, and corporate earnings are forecasted to close lower this year. An inverted yield curve and tight monetary policy historically mean a slowdown as well. However, this doesn’t indicate what will happen or when! Markets are, in fact, the crystal ball–you just need to follow them. The opportunity cost of guesswork over time will always be too high. So, we sift through the noise, connect portfolios to your personal headlines and plan, and let the market work for you.


We hope you stay cool during this heatwave, and enjoy your summer. And as always, please let us know about any changes in your family or financial life which need to be addressed!


Sources: 2023 Index Returns dimensional.com, First Trust Monday Morning Outlook June 26th, 2023, First Trust “CPI Rose 0.1% in May”,, Federal Reserve Board of Atlanta GDPNOW June 27 2023, BLS.gov ‘More Ways to Look at Wages and Inflation”, FRED.com M2 Money Supply, FRED.com US Debt to GDP, Zacks Investment Management June 2023 “US Stocks Entered a Bull Market, Will it Last?”, Zacks Investment Management “How Will a Weakening Dollar Impact Stocks?” May 4, 2023, Vanguard “Outlook for Financial Markets” June 22, 2023, wsj.com “Why Bidenomics Gets No Love From Voters” June 28th, 2023, The Atlantic “The Long History of Government Debt” November 13 2012


This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results. Diversification does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.


Index Disclosures:


Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.


Index Definitions:


The ISM Manufacturing index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys. Values over 50 generally indicate an expansion, while values below 50 indicate contraction.


The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.


Barclays U.S. Aggregate Bond Index: The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index of fixed rate debt securities rated investment grade or higher by Moody’s, Standard & Poor’s, or Fitch rating services. All issues in the index have at least one year to maturity and an outstanding par value of at least $25 million to $1 billion based on the type of security. Indices are not available for direct investment and do not reflect any fees that may be charged.


S&P 500®: The S&P 500® index is an unmanaged index of 500 companies used as a representative sample of the United States economy. The S&P 500® index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.


MSCI Ex-US: The MSCI Ex-US index is an unmanaged index used as a representative sample of the global developed economy outside of the United States. The MSCI Ex-US index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.


MSCI Emerging Markets: The MSCI Emerging Market index is an unmanaged index used as a representative sample of the global emerging market economy outside of the United States. The MSCI Emerging Market index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.


The Russell 2000 index is an unmanaged index of the 2000 smallest companies in the Russell 3000 index. The Russell 2000 Index is used as a representative sample of the small companies in the United States economy. The Russell 2000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.


The Russell 3000 index is an unmanaged index of 3000 companies in the United States. The Russell 3000 Index is used as a representative sample of the United States economy. The Russell 3000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.


DJIA: The Dow Jones Industrial Average is an unmanaged index of 30 companies used as a representative sample of the United States economy. The DJIA index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.


Nasdaq Composite Index: The Nasdaq Composite Index is a market capitalization-weighted index of more than 3,700 stocks listed on the Nasdaq stock exchange. The Nasdaq Index is heavily weighted toward the technology sector and consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.


[1] Investing internationally carries additional risks such as differences in financial reporting, currency exchange risk, as well as economic and political risk unique to the specific country. This may result in greater share price volatility. Shares, when sold, may be worth more or less than their original cost.


[2] Investments in emerging markets may be more volatile and less liquid than investing in developed markets and may involve exposure to economic structures that are generally less diverse and mature and to political systems which have less stability than those of more developed countries.



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