What happened in the markets - 26-30 June 2023
Introduction
As we reach the midpoint of 2023, it's time to reflect on the market's performance and gain insights into what the future may hold. The first half of the year brought encouraging news for investors, marking a stark contrast to the challenges faced in 2022. Supported by a more favorable outlook for Federal Reserve policy, inflation, and a resilient economy, market gains have been healthy. However, beneath the surface, unique drivers of performance and potential risks come into play, emphasizing the value of a diversified strategy. In this article, we delve into the key takeaways from the first half and explore what they signify for the second half of 2023.
Key takeaways from 2023 H1
Strong Start and Positive Stock Performance: The first half of 2023 witnessed a robust start, building upon the rally that commenced from the bear-market lows of October 2022. Expectations surrounding Federal Reserve rate hikes have predominantly influenced equity movements. While January's rally faced setbacks due to concerns about persistent inflation and further tightening by the Fed, as well as the bank crisis in March, the market rebounded. The U.S. stock market has surged approximately 23% since mid-October, reclaiming a significant portion of the losses incurred in the previous year.
Tech Sector Outperformance: Technology and growth investments have been at the forefront of the market's resurgence, as they rebounded strongly this year after experiencing a downturn in 2022. The outperformance of the tech sector has been evident in the contrasting performances of the tech-heavy Nasdaq and the Dow Jones Industrial Average. Mega-cap tech companies such as Apple, Microsoft, Tesla, Amazon, Alphabet (Google), NVIDIA, and Meta have seen substantial gains, with an average increase of approximately 85% in the first half of 2023. However, the market's gains have been relatively narrow, highlighting the potential vulnerability to a short-term pullback if these tech giants stumble.
Market Volatility and Interest Rates: Market volatility has been relatively low for much of 2023, except for a short-but-sharp reaction to the bank turmoil. The VIX index, a measure of market volatility, has steadily declined and reached its lowest level since before the pandemic. However, investors should anticipate greater market fluctuations in the second half of the year.
Interest rates stabilised: Longer-term interest rates have stabilized, while shorter-term rates have shown slight buoyancy due to positive economic data and indications of potential rate hikes by the Federal Reserve. The interest rate environment has been more benign compared to the volatility experienced in 2022, although further evidence of inflation trending back toward the Fed's 2% target is required for a significant pullback in yields.
Resilient Economy and Small-Cap Equities: The economy showcased unexpected strength in the first half of 2023, with better-than-expected GDP growth primarily driven by a surge in personal consumption. Household services and discretionary spending played pivotal roles, underpinned by a robust labor market. However, it is anticipated that economic growth will slow in the second half, with both employment and spending growth likely to soften. Although small-cap equities have shown signs of optimism, indicating a positive outlook for domestic economic growth, a decisive upturn has yet to be observed.
Strong First Half and Historical Patterns: The 15% return of the S&P 500 in the first half of 2023 marks one of the best starts since 1990. Historically, strong first halves often pave the way for healthy full-year returns, as exemplified by ten years since 1990 when the stock market gained over 10% in the first half, and the market continued to rise in the second half of each
What does this mean for long-term investors?
For long-term U.S. stock market investors, the strong start and positive performance in the first half of 2023 provide reasons for cautious optimism. The market's resilience, coupled with a more favorable outlook for Federal Reserve policy and inflation, indicates a supportive environment for continued growth. However, it's important to remain mindful of potential risks and market fluctuations in the second half of the year.
Diversification remains crucial to navigate potential short-term pullbacks and capitalize on opportunities that may arise. Investors should maintain a long-term perspective, focusing on fundamental factors such as company performance, industry trends, and economic indicators. By staying informed and adhering to a disciplined investment approach, long-term investors can position themselves to benefit from the potential for healthy returns in the U.S. stock market over time.
Source: Yahoo Finance, CNBC
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A recap of the first half of 2023 for US stock market investors:
Tech Sector Rebound: Technology stocks, especially mega-cap names such as Apple, Microsoft, Tesla, and Amazon, have experienced a notable resurgence. This rebound signifies a revitalized technology sector, which had faced challenges in the past year. Investors should pay attention to the continued performance of these companies, as they play a crucial role in driving market gains.
Market Volatility Outlook: While market swings have been relatively subdued throughout 2023, except for a short-lived disruption during the bank crisis in March, it is prudent to expect increased market fluctuations in the second half of the year. Investors should remain vigilant and prepared for potential shifts in market sentiment and volatility levels.
Economic Strength and Future Projections: The US economy has defied expectations and displayed resilience in the first half of the year, supported by robust household spending. However, economic growth is anticipated to slow in the coming quarters. Investors should monitor key indicators such as employment data and consumer spending patterns to gauge the economy's trajectory.
Small-Cap Stocks and Domestic Economic Growth: Small-cap stocks, which are often more responsive to domestic economic conditions, have shown signs of leveling off in comparison to large-cap counterparts. This signals emerging optimism in the outlook for domestic economic growth. However, it is essential to note that a definitive upturn in small-cap performance is yet to be observed, indicating that the overall economy may experience some weakness.
Long-Term Investment Approach: While the first half of the year has yielded strong market returns, it is crucial for long-term US stock market investors to maintain a disciplined and diversified investment approach. Careful consideration of fundamental factors, such as company financials and market trends, coupled with ongoing market research, will help navigate potential economic weaknesses and fluctuations in inflation.
Remember, investing carries risks. Consult a financial advisor for guidance. Stay informed and stick to a well-informed investment strategy.
Source: Yahoo Finance, CNBC
