Market Commentary July 2023

Look it’s a bird, it’s a plane, no it’s artificial intelligence here to put the market on its back and carry us on to new hype, I mean heights.  Just when the market needed a boost to move the needle out of the trading range it had been trapped in for the last 12 months along came ChatGPT to energize stocks related to AI technology in any way no matter how distant the relationship.  Investors must decide is this a new massive hype cycle like 3D printing, the Metaverse or Crypto currency that pumps stocks full of hot air only to be caught holding an empty balloon or is it something that will change the economy and allow those that harness its power extraordinary earnings momentum and future stock prices that soar to new heights?

Recession anyone?  What looked like a sure thing at the beginning of the calendar year is no longer such, at least based on the revisions and backpedaling of some, not all, market prognosticators.   In the most recent Bloomberg forecaster survey respondents put the odds of a recession at a 65% median probability.  Some are significantly below this level with Goldman Sachs now putting the 12-month odds at just 25%.   Is it just us or is the key to being a widely quoted and followed market “expert” on a cable business channel is to predict stock market and interest rate directions early and often without being weighed down or reminded of one’s past predictions?

Despite the potential AI hype and recession possibility you cannot question the market returns through the first half of 2023.  The technology sector was up 17% in Q2 of 2023 bringing its’ year-to-date return to 43%.  This outperformance lifted the overall market to a healthy 17% for the year.  It is interesting to compare the difference in returns of the S&P 500 of 17% to the S&P 500 equally weighted index return which was a meager 7%.  The huge disparity between growth and value index returns resumed as the growth portion outperformed the value part of the index by a factor of 29% to 5%.  Can we interest anyone in a quality dividend stock today?  Anyone?

Large cap again outperformed small cap, growth outperformed value and domestic bested foreign.  We do not need ChatGPT to write this portion of our report because we can just dust off every quarterly letter from the last decade, apart from 2022.  Nasdaq just announced they are enacting a special rebalance of the Nasdaq 100 Index.  Probably appropriate when the top two stocks in the index (Apple and Microsoft) comprise 25% of the index and the top 10 stocks make up 60% of the same.

The nice equity performance thus far in 2023 has come despite short-term interest rates rising to 20-year highs.  Suddenly clients are asking us about the yield on their money market fund (4.7%).  A six-month treasury bill will earn an investor 5.3%. A two-year treasury is at 4.9% and a ten year drops below 4%.  That is an inverted yield curve and investors are left to assume that the inflation trend out a couple of years is lower.  The stock market is certainly behaving as this is the base case.  Even the commodity indices have been negative this year with lower oil and natural gas costs.

Moving forward, we would urge investors to remain invested but vigilant.  The large tech companies have fueled almost all of 2023’s rally.  Should the rally broaden out to more companies this would be bullish.  These runs often last much longer than expected and we would not be surprised to see the market put up a positive return in the second half of 2023.  At some point valuations for dividend stocks will be so low compared to their AI brethren they become too compelling to ignore.  From a fixed income perspective, the rising short-term rates provide investors with enough reward to ignore the lower quality portion of the bond market for a few more pennies of income.  If nothing else, the second half of the year should be interesting.  Second quarter earnings season will begin in earnest next week and the general path of earnings performance will be a good indicator of how the market finishes the year.