A Long Way To Go

Investment Commentary by Brett

The US equity markets (S&P 500 index) had an astounding second quarter, recording an 8.74% return for the quarter and 16.89% year to date. The US Aggregate Bond index also posted 2.12% Year to date return. In many instances this would be considered a successful yearly return, let alone the first 6 months.

Several positive things transpired in the second quarter. We saw Republicans and Democrats agree on a bipartisan debt ceiling deal to avoid an unprecedented US government debt default.  The Federal Reserve paused its rate raising cycle as year-over-year inflation began to decline, indicating inflation has peaked. We even saw the stock market rally 20% from its 2022 lows emerging out of “bear market” territory.

Does this mean the coast is really clear for continued gains? Not necessarily. As Federal Reserve Board Chairman Jerome Powell stated, “The process of getting inflation back down to 2% has a long way to go.”  While we saw year-over-year inflation begin to decline and the interest rate raising cycle pause, it remains unclear what the lasting effect of the higher interest rate environment will have on the overall economy. Many consumer lending rates, such as mortgage rates, are at their highest level in over 20 years. So far, consumers have stayed resilient to the higher interest rate environment; however, only time will tell if that narrative holds true.

An interesting conundrum is beginning to form. Should US consumers remain too resilient to the higher interest rate environment, interest rates will likely go higher. If US consumer spending slows dramatically because of the higher interest rate environment, then we may see the economy enter into a recession. If the Federal Reserve cuts interest rates too soon, we could see inflation begin to climb again. It’s a major dilemma, but hopefully not impossible to navigate!

The first half of 2023 was one more reminder that the equity markets “climb a wall of worry”. Sometimes positive surprises come when sentiment is very negative, and other times things look very rosy and don’t quite live up to expectations. It’s good to appreciate when the stock market is kind to us, while acknowledging that will not always be the case. Maintaining a diversified portfolio can help us prepare for the inevitable rough patch that lies somewhere down the road.