2023 Mid-Year Update

Summer greetings,

2023 has been full of surprises both good and bad. We’ve seen extreme rain, extreme heat, smoke from wildfires in Canada, and Ukraine still in the fight. Inflation is sticky, jobs are strong, and stocks and bonds are both up!

Economic big picture: The Federal Reserve has continued to flex its muscles with 10 hikes in a row, followed by one pause in June. They are one of the most powerful influences on our economy. They have a dual mandate of full employment 95% or better, and an inflation target of 2%. Currently, the Fed is targeting 2 more rate hikes this year, to slow the economy and inflation. Lending from banks has dropped off a cliff. Expectations are for the U.S. economic growth to be around 1% over the next year. Healthy GDP is 3-4% and should at least cover inflation. The Resilient job market has been too strong for the FED, with unemployment around 3.5% this past year. The FED target is 4.5% unemployment by year end (unlikely). They are way behind the inflation target of 2%, so expect higher rates for longer with a continued headwind for the economy.

Turning to stocks: Large Technology stocks have carried the market this year. The first half Nasdaq performance is the best since 1983 (before smart phones, and before most of us had a home computer, and that www (search thingy). 95% of the S&P500 performance year to date is thanks to 10 Mega Cap Tech oriented Stocks. Small to Mid-cap Stocks are positive but have lagged tremendously. Corporate earnings have also been negative the past two quarters. They are expected to be negative for this quarter as well. Higher earnings= Higher Stock prices. This measure will need to improve, and the FED will need to take a break, before we can have broad based expansion. It can’t come soon enough!

Bonds and Cash: Short-term interest rates are the highest in 16 years, cash alternatives are finally matching inflation. Yes, that means your savings account has underperformed inflation since 2007. Bond yields are higher than stock dividend yields, so bonds finally have earned their place in a diversified portfolio! The yield on the S&P 500 is currently 1.57%, 10yr Treasury bond 4.04%, T-bills 5%+!

Real Estate: Commercial and Residential markets are soft, and this is highly correlated with borrowing costs more than doubling over the past two years. The average size U.S. home being sold today costs $400k. If you include the mortgage, property taxes, and insurance, expenses average approximately $3,000/month for the homeowner. This is roughly a $1,000 more than renting the same sized home. This is creating a generation of long-term Renters. New construction for commercial and single-family homes are down over 25%+ from a year ago. It will take the Federal Reserve cutting rates a couple times, banks to start lending, and a more robust economy to get new building back on track. This is more likely a 2024+ scenario.

We will hope for more positive surprises in the second half of the year. I will be happy accepting better bad news as good news, in addition to actual good news.

Enjoy the rest of the summer!

Source of Data: FactSet

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Michael Rodenbaugh and not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice.