Q2 2023 Quarterly Market Commentary

Financial Markets Rebound in the First Half of 2023

A year can make a big difference. One year ago, the market was trying to catch its breath after a volatile start to 2022. The Federal Reserve had raised interest rates by 1.5% in a single quarter. Inflation peaked at 9% as Russia’s invasion of Ukraine upended commodity markets and competition for employees resulted in wage inflation. The S&P 500’s first half 2022 return was its worst start to a calendar year since 1970. In contrast to the first half of 2022, the first half of this year is markedly different. Oil prices are 33% lower, inflation is running at a 4.1% pace, and the S&P 500 is up nearly 15%. This commentary will review the second quarter, recap the strong start to 2023, and discuss the outlook for the second half of the year.

Data Highlights U.S. Economy’s Momentum

While the backdrop has significantly changed, second quarter economic data highlighted the U.S. economy’s continued resilience. In the housing market, new home sales rose more than 10% year-over-year in both April and May as tight inventories pushed homebuyers to the new construction market. Personal income, which measures an individual’s total income from wages, investments, and other sources, continued to grow. While unemployment rose slightly to 3.7%, companies added approximately 300,000 jobs in both April and May. Revised data showed the economy expanded at a faster pace in the first quarter than previously estimated. First quarter U.S. GDP growth was revised up to a 2% annualized pace from the initial 1.3% estimate, reflecting upward revisions to exports and consumer spending.

The data underscore the economy’s momentum, but it’s backward-looking rather than forward-looking. An index of leading economic datapoints suggests the U.S. economy may be near a turning point. Comparing the year-over-year change in the Leading Economic Index (LEI) against the Coincident Economic Index (CEI) provides some interesting insights. For context, the LEI is an index of ten economic datapoints, such as unemployment claims, building permits, and manufacturing hours worked, whose changes tend to precede changes in the overall economy. The CEI is an index of four datapoints, such as industrial production and personal income, that tend to move with the economy and provide an indication of its current state.

Data shows the LEI declined 8% during the past 12 months, an indication the economy may be approaching a turning point as the Fed’s interest rate hikes take effect. Conversely, the CEI rose 2% over the same period, an indication the economy currently remains strong. Positive CEI doesn’t necessarily mean the economy has avoided a recession, but the CEI’s rise does provide additional evidence showing the U.S. economy’s resilience despite higher interest rates. Similarly, it’s not uncommon for the LEI to decline even as the CEI remains positive. However, past data indicate the U.S. economy has been near the start of a recession each time the LEI fell by more than 5% in preceding 12 months.

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