What happened in the markets - 3-7 July 2023

2 Jul

Introduction

Many investors are surprised by the relative calm in financial markets overall so far in 2023, after the choppier conditions following the bond sell-off last year. In this week’s Weekly Market Recap, we review the performance of the markets in the first half of the year and assess the odds of these trends continuing.

Key Takeaway in first week of 2H2023

Many assets that suffered in 2022 have made up some of their losses, and vice versa – this may well continue for now.
We continue to see positive catalysts on the equity markets for quality and growth stocks.
The Tech sector is leading the markets in 2023. Core drivers of the rally can be attributed to investors seeking a safe haven in mega Tech due to inflation and interest rate uncertainty, cost-cutting measures, and the AI revolution.
Despite mega Tech stocks dominating the sector, many smaller Tech stocks offer strong forward growth rates, excellent profitability, and trade at substantial discounts to the sector.
Each stock is strong buy-rated and offers excellent fundamentals, bullish momentum, and tailwinds to complement boosted investor sentiment amid improving economic conditions.
S&P 500 rises on Friday as traders try to shake off fears that the Fed will resume hiking rates

US equities offer safer haven when growth slows

A staggering first half of the year has seen quality and growth stocks strongly outperforming in equity markets. We have long vouched for these two investment styles given the uncertain economic environment. We want to stay invested in companies with healthy and solid balance sheets that can sustain the economic slowdown and higher refinancing costs. In an environment of growth scarcity, companies that point to higher sales and earnings growth in the medium-to-long term typically outperform.

Regarding our country allocation, we maintain our preference for the US equity market versus the European equity market. The main reason relates to the above-mentioned factors, with the US enjoying a much higher degree of exposure to growth and quality styles than Europe.

*This chart shows the greater market capitalisation, lower volatility, quality and growth of the S&P 500 against the Stoxx Europe 600 index.*

At the same time, the rather cyclical bias of European stocks will also translate into a headwind given the economic slowdown we are facing. Equities in Europe are essentially pointing towards a strong economic recovery rather than a slowdown, which just does not fit with the current state of activity. In addition to being value markets, European markets are also cyclical in nature, while we see less of this in the US.

Further gains in equities expected in second half of year

The first half of 2023 was quite spectacular. In terms of total returns year to date (as at 30 June 2023), the S&P 500 rose by 16.9%, while the Nasdaq 100 increased by 39.4%. We are seeing a broad-based risk appetite, especially in Europe and the US, where equity markets and credit markets performed well.

Looking at history for some guidance, we can see that, in the past, strong first-half returns lead to further gains; if the S&P 500 had already risen by more than 10% in the first half of the year, then it rose another 6% in the second half.

Furthermore, the global equity market is broadening, as US small-cap stocks and Asian equities outside of Japan are stabilising. Thus, we expect further gains in equities in the second half of this year, albeit lower than in the first half. Hence, we recommend that investors stay invested in equities, with a preference for US growth stocks.

S&P 500 rises on Friday (Jul 7, 2023) as traders try to shake off fears that the Fed will resume hiking rates

Stocks rose on Friday as traders fought to overcome worries that the Federal Reserve may start hiking rates again. All the major averages headed for a week of losses, however.

The S&P 500 added 0.3%, while the Nasdaq Composite rose 0.6%. The Dow Jones Industrial Average hovered near the flatline.

All three major averages are headed for a losing week. The S&P 500 is off by about 0.4%, while the Nasdaq is on pace for a slight decline. The Dow is the underperformer of the three, tracking for a 1.3% loss.

Big Tech Dominates the Markets

Tech stocks are rallying high and forging a positive path in 2023 after a rough 2022. Following six consecutive quarters of declines, FAANG stocks continue to be favorites despite market conditions, which are now topping expectations with Apple (AAPL) of investors' eyes up nearly 50% YTD, and Amazon (AMZN) and Netflix (NFLX) close behind.

Despite inflation worries high and the Federal Reserve tightening rates aggressively, the market has confounded expectations for difficulties in 2023 and has just turned in remarkable performance for the first half of the year. The Russian invasion of Ukraine continues to cast a shadow over markets.

A stock market rally that kicked off 2022 soon fell on its face. The market overall has been choppy since then, with bear market rallies often being undercut by painful drawdowns. But recent bullish action has seen the Nasdaq and the S&P 500 move back above their major moving averages, with the passage of the debt-ceiling deal helping to push indexes higher.

The stock market is back in a confirmed uptrend. This means it is the best time to be buying fundamentally strong stocks breaking out of proper base patterns, such as those in the IBD 50. These names will tend to have rising relative strength lines. The stocks below are good candidates. It's also a good time to add to existing holdings at follow-on opportunities.

Remember, there is still significant headline risk. Inflation remains a key issue while the Russia-Ukraine conflict is a wild card that has proved its ability to shake the market. Buying a stock is easy, but buying the right stock without a time-tested strategy is incredibly hard. So what are the best stocks to buy now or put on your watchlist? Chipotle Mexican Grill (CMG), Shopify (SHOP), MongoDB (MDB), DexCom (DXCM) and HubSpot (HUBS) are prime candidates.

Conclusion

After a brutal 2022, Tech is coming back in 2023, with some of the largest companies capturing market share in the indexes. We see buying opportunities for the long term, especially in industries like semiconductors, differentiated software, and electrical components that are increasingly important for the sector.

Source: Julius Bär, SeekingAlpha, Investors, CNBC.