Markets Continue to be Resilient

For the third consecutive quarter stocks posted positive returns. The S&P 500 index was up 8.7% in Q2 and 16.9% in the first six months of the year. Market breadth is a concern, however, as the top 10 stocks in the S&P 500 accounted for over 95% of the index’s gains in the first half of the year.

Style divergence continued this past quarter. The Russell 1000 Growth index was up 12.8% in Q2 compared to a 4% gain for the Russell 1000 Value index. For the first half of the year their returns were 29% and 5.1%, respectively. Meanwhile, the small-cap index, the Russell 2000, posted a gain of 5.2% this past quarter and 8.1% through the first two quarters of 2023. Foreign markets were positive, too, although they lagged the S&P 500. The MSCI EAFE international index gained 3.2% in Q2 and is up 12.1% through the first half of the year. Emerging markets, as represented by the EAFE EM index, gained just over 1% in Q2 and 5.1% since the beginning of the year.

The Fed: Too Fast, Too Slow or Just Right?

For nearly the past one and a half years the Fed has raised rates ten times with four ¼ point increases, two ½ point increases and four ¾ point increases as they battle inflation. Inflation peaked in June of 2022 at 9.06%. It has declined in every month since then with an end of June rate of 3%, which is still above the Fed’s target of 2%. At the June meeting the Fed paused further rate increases but indicated two more increases are likely before the end of the year. The Fed continues to balance its efforts to control inflation without disrupting the US economy.

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GDP growth went from 2.6% in Q4 2022 to a revised 2.0% in Q1 2023. This suggests the Fed’s rate hikes are cooling the economy and assisting in bringing down the rate of inflation. Unemployment, though, dropped 0.1% to 3.6%.

Increased rates and higher borrowing costs should slow the economy, eventually getting inflation down to the Fed target. The easier part of this task is completed, moving from slightly over 9% to a little over 3%. Moving from a 3% inflation rate to a 2% inflation rate will be more difficult. Positive job growth, although slowing, along with wages increasing, and a very low unemployment rate, will likely force the Fed to continue with rate increases.

Earnings season is upon us. Wall Street projects a 5% decline in earnings for the companies in the S&P 500. If these expectations are accurate a 10% correction would not come as a surprise. Short-term, risk-free treasuries are yielding over 5%. This is very tempting, not only for fixed-income investors, but for equity investors who are concerned with stock market volatility. They may believe the generous treasury numbers and an adjusted risk/reward ratio does not warrant additional equity exposure. However, long-term investors who build and maintain portfolio asset allocations appropriate for their time horizon and risk tolerance may still come out ahead in the long-run.

WE ARE HERE FOR YOU

The New Year provides many great opportunities to get a financial plan in place or reevaluate your risk profile. The Platt Wealth Management team is here for you to discuss any changes or new milestones in your life. We are always available to assist you with any financial matters and we look forward to continue to serve you along your financial journey.

Warmest regards,
Platt Wealth Management