Over the past several years, the world has had its share of dramatic events. These include the global pandemic, continual political rancor, and the war in Ukraine. As if these events weren’t enough, investors have had to deal with the effects these issues brought on their hard-earned capital. Through often unnerving headlines, equity markets have battled back. Since 2020, equities have turned in strong returns. As the song goes, “What a long, strange trip it’s been.”
So far, markets have continued a similar trip in 2023. Some of the challenges were evident and highly reported. Inflation, largely the result of the accommodative Fed policies of the pandemic, initially showed few signs of abating. Recognizing the corrosive effects of high inflation, the Fed raised interest rates even higher. Despite a pause at the last meeting, they said they expect to resume hikes.
It is often said that during tightening cycles, the Fed will raise rates until “something breaks.” It didn’t take too long to find out. In the spring, three banks failed, falling victim to declines in the value of their holdings and fleeing deposits. A popular question in the financial media was, “who’s next?”
More headlines were coming. Political fighting continued as the U.S. debt ceiling approached with neither side apparently willing to budge. Treasury Secretary Janet Yellen warned a failure to reach an agreement, “would cause severe hardship and harm our global leadership position.” After much drama, an agreement was reached within mere days of the deadline.
2023 Market Recap
Despite the many challenges that 2023 continues to present, stocks and bonds, along with most other asset classes, have posted solid returns. The Dow Jones Industrial Average is up almost 4% year-to date. The broader S&P 500 Index bolted to a gain of over 16%. The out-sized returns of the S&P were largely due to a hand-full of large technology stocks as the sector recovered from last year’s drubbing. If one were to strip out the stocks that soared due to recent artificial intelligence excitement, returns would have been much lower. The lack of broader participation of sectors are a concern and is something we are watching. However, there was advancement in other areas. Year-to-date, smaller stocks, represented by the Russell 2000 Index, rose 8.1%. International stocks also fared well with the MSCI EAFE Index jumping 11.7%.
Against the headwinds from all the rate hikes, bonds still managed to turn in positive returns. The Barclays Aggregate, a measure of the total bond market, advanced 2.1%. Municipal increased 2.7% for the first half. High-yield bonds, despite tighter credit conditions led the pack with a 5.4% gain. While the rise in rates eroded bond values in 2022, we are encouraged that fixed-income investors have a better opportunity for more reasonable returns going forward.
So, given the current issues, why did markets turn higher in the first half? Inevitably, threats and challenges come about in both life and investing. When they present themselves, it is in our DNA to recoil and calculate worst-case scenarios. To some investors, this means selling and hastily altering portfolios to the new possibilities.
Yes, inflation, interest rates and political uncertainties are still with us. But as worst-case scenarios have, so far, failed to materialize, markets continued to recover. While we are diligent in watching for threats to our clients’ capital, we also believe in restraint. Famed investor, Charlie Munger, will turn 100 years-old in a few months. He is still active in investing and remains direct and plain-spoken. He once said, “The big money comes not from the buying and selling, but from the waiting.”
What do we do now?
On the macroeconomic level, we will be looking for signs that inflation continues to move closer to the Fed’s target. Another consideration is economic growth. The balance between removing stimulus without causing a recession is a delicate balance. The data will sometimes be inconsistent and conflicting. The market’s reaction will sometimes be erratic. While we can’t control the data or market movements, we help navigate through them. As you know, we have been through this before.
Of course, our clients are the center of our process. In markets that are highly data-dependent, many will try to predict each economic release and market movement. The results are usually spotty, at best. We instead focus on the end goal of getting clients through these periods with a longer perspective and mathematics.
Good communication is a big part of this. In addition to all the analysis and numbers, we know there are real people attached to the money we oversee. As important as keeping you aware of key events that affect you, we want to know what you think. Please reach out if we can help.
Brian R. Smith, CFP®, CRPC®, AIF®*,CBEC®
201 Office Park Drive, Suite 300
Birmingham, AL 35223
Sources: Forbes, CNBC, S&P Global, Wall Street Journal, The Economist, Federal Reserve Bank of St. Louis
The performance of an unmanaged index is not indicative of the performance of any particular investment. It is not possible to invest directly in any index. Past performance is no guarantee of future results. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Three-year performance data is annualized. Bonds have fixed principal value and yield if held to maturity and the issuer does not enter into default. Bonds have inflation, credit, and interest rate risk. Treasury Inflation Protected Securities (TIPS) have principal values that grow with inflation if held to maturity. High-yield bonds (lower rated or junk bonds) experience higher volatility and increased credit risk when compared to other fixed-income investments. REITs are subject to real estate risks associated with operating and leasing properties. Additional risks include changes in economic conditions, interest rates, property values, and supply and demand, as well as possible environmental liabilities, zoning issues and natural disasters. Stocks can have fluctuating principal and returns based on changing market conditions. The prices of small company stocks generally are more volatile than those of large company stocks. International investing involves special risks not found in domestic investing, including political and social differences and currency fluctuations due to economic decisions. Investing in emerging markets can be riskier than investing in well-established foreign markets. The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The Russell 2500 Index measures the performance of the 2,500 smallest companies (19% of total capitalization) in the Russell 3000 index. The S&P 500 index measures the performance of 500 stocks generally considered representative of the overall market. The Wilshire REIT Index is designed to offer a market-based index that is more reflective of real estate held by pension funds. CRN-5793355-070623