As we head into the second half of 2023, I wanted to take a moment to look back on how the year has started. It’s been a good, or possibly even great, start to the year for stocks, depending on which stocks we’re talking about. The top-heavy S&P 500 has been terrific, posting one of its best first-half returns ever. That’s in direct contrast to the first half of 2022, which was the worst January-June period for the stock market in over 50 years. That’s why we advise that, no matter how bad the outlook, it’s not wise to try to time the stock market. It can come back quickly, especially when no one is expecting it.
The other stock market indices have done well, also, with the Dow Jones Industrial Average up about 5% year-to-date and the equally weighted S&P 500 up about 6%. I figured that bonds would have a good 2023, and the Bloomberg US Aggregate Bond Index is up over 2% so far, with corporate bonds having doubled that return. So, corporate bonds are up nearly as much as the Dow Industrials in 2023.
The first half of this year has really been in stark contrast to the first half of 2022. Of course, the war in Ukraine set a somber tone for investment last year, as did the Federal Reserve’s interest rate hiking policy and the relentless inflation we faced. This year, we are seeing a reversal in those…there have been softening inflation numbers and while the Fed is still raising rates, there is hope that they’ll be done soon. The Fed raises rates to slow inflation and while inflation is still higher than what we had become accustomed to, prices are increasing are at a much slower rate.
We’ve also had excitement surrounding artificial intelligence (AI). The effects of AI on the stock market and the economy will take a long time to play out, but it has added an optimistic tone. It may also have had an impact on corporate earnings estimates. Heading into the year, expectations were for a significant contraction in earnings. However, companies have updated their guidance, and the new expectations aren’t nearly so dire. Since corporate earnings are reflected in stock prices, this has contributed to the strength we have seen in stocks.
The consumer also remained strong, which helped keep economic growth higher than expected. How much longer this can last is up for debate, but there’s no doubt that the surprises have been to the upside.
When I look at all of this, I see markets that are priced based on optimism. Short-term, over the next month or so, I believe we’ll see large-cap stock indices slow down, or maybe even pull back a bit. They really look extended. Additionally, as I have written in the past, the end of Fed rate-hiking is not always a good thing…it can mean that they have slowed the economy too much, which can soften stock prices. I continue to think that bonds will do well, so investors with allocations that call for bonds can continue to look there. And, as I’ve mentioned, we still have money market mutual funds and CDs that yield more than 5%.
In closing, as I’m writing this on July 3, I thought I’d share these thoughts on America as we celebrate the 247th anniversary of the adoption of the Declaration of Independence. These came from the 1440 Daily Digest, which I find to be a great source of unbiased daily headlines. They write that since 1776:
the country has grown from 13 colonies with about 2.5 million people to 50 states and 14 territories with a population of more than 330 million. The economy has swelled to over $26T, with a median household income above $70K.
Scientific and technological advances—public sanitation, the germ theory of disease, and more—have revolutionized public health, with our citizens living 35 years longer on average since the mid-20th century. Deaths during childbirth have dropped fiftyfold, while the child mortality rate—the percentage of children dying before age five—has plummeted from 45% to 1%.
We’ve built almost 4 million miles of paved roads and more than 5,000 public airports. More than 2.7 million miles of power lines electrify the country, with about 85% of households having access to broadband internet and 92% having at least one computer. In 1800, 95% of the population lived in rural areas, and now about 83% live in urban areas.
Almost 90% of adults have a high school degree or equivalent, while just over one-third have a college degree. About 45 million immigrants call America home—the most of any country—while a roughly equal number of international tourists visit each year.
We’ve accomplished all of this despite wars, droughts, depressions, recessions, impeachments, civil unrest, and riots. I certainly will be betting on America and our corporations, and it’s exciting to think about what the next two and a half centuries will bring.