The Seesaw Of Ambiguity
The 2nd quarter of 2023 has ended, and half the year is behind us. As I write this, it seems as if there is a disconnect between the markets and the economy. Economic signs are alerting us that a recession may be on the horizon, while markets in the US and Europe have progressed off 2022 lows. Manufacturing has slowed, but the service industry remains strong. We even saw the Federal Reserve halt increasing interest rates last month, putting the brakes on a yearlong interest rate hike cycle. As we are looking forward to the next quarter, there is some looming uncertainty, but also good news. Does this article so far point to a seesaw of ambiguity? We agree.
As Q1 2023 ended, financial markets attempted to grasp the uncertainties causing stress to the U.S. and European banking systems, data supporting continued inflation pressures, and deteriorating commodity prices. There was also a strong move in Chinese economic data following the lifting of covid restrictions, and Central banks persisted in tightening monetary policy. This all set the stage for expectations that a deep recession was imminent, and that the Fed would change course and begin cutting rates. As of June 30th, 2023, inflation persists, and the Fed signaled that they would consider keeping rates elevated at their next meeting in July.
This uncertainty hasn’t prevented a few sectors from rallying. There have been mega-cap stocks in the tech sector with names associated with (AI) artificial intelligence, telecommunications, and consumer discretionary (which comprise of apparel, autos, home improvement, and restaurants) were the front-runners in the market this quarter. Year to date, these three sectors account for most of the total return in stocks.
The US yield curve is currently inverted, meaning shorter-term bonds have a higher yield than longer-term bonds. This typically happens toward the end of Fed rate hiking cycles and usually lasts for a brief period before rates normalize. Normalization is when short term rates move lower than long term rates, the opposite of inversion. As a result, Bond investors have not been able to gain a firm footing and recover from last year’s decline in bond values. The Fed’s rising interest rate policy planned to fend off inflation, but instead caused substantial losses in bond values. As the Fed sees it, the fight is not over yet and the potential for higher rates is on the table. This has dashed hopes that rates will drop in the near term. However, yields remain attractive at current levels. Locking in these high yields may be of benefit in the long term for investors who seek high income when rates eventually drop.
Europe has entered a mild recession, but the European, Japanese, United Kingdom and Canadian stock markets have had strong performance since the end of last year. Emerging markets lagged as Chinese stocks created a headwind for the asset class. China is facing challenges as the decade long construction boom weans as the urbanization of the population slows. The world has begun to reroute supply chains away from China because of the effects of covid interruptions. As a result, China’s economic growth and market are slowing and may take time to rebound.
At Renew Family Wealth, we are hopeful there will be a soft landing to the Fed’s monetary tightening policy, or at worst a mild recession coupled with a resilient broader base movement in the stock market. Unfortunately, there is no certainty as to the outcome of this economic and market cycle. As a result, we are actively seeking to allocate appropriately based on an investor’s risk tolerance. We welcome the opportunity to assist in assessing how market and economic conditions are impacting you, your family, and those you know. Please do not hesitate to contact us to set up a meeting to discuss how we may be useful to you.
Gratefully,
Scott Miller
Partner
