ACG Market Review – Q2 2023

(Download the full report HERE)

Global Highlights

  • Economy – A much anticipated recession has yet to materialize despite aggressive Fed policy over the past few quarters
  • Equities – A handful of U.S. Mega Cap companies drove returns in what has been a bounce-back first half of the year for stocks
  • Fixed Income – Volatility remained high relative to history amid uncertainty around inflation, economic growth, and Fed policy

Optimism Returns to Equity Markets

After a painful 2022, the second quarter built on what has been a rebound first half of the year for stocks. The quarter began with some lingering worry over broader repercussions from stress in the regional banking sector, ongoing uncertainty around the pace and direction of U.S. Federal Reserve (“Fed”) policy, and the threat of a recession that has been hanging over the economy for several months. Fed rate hikes, despite a pause in June, have failed to outweigh the bullish sentiment driving markets so far in 2023. Stock indexes across the globe were universally positive in Q2 driven by multiple catalysts including declining inflation, resilient company earnings, enthusiasm over the prospects for artificial intelligence (“AI”), and economic data that has buoyed hopes for a soft landing. The second half of the year will likely test the strength of the recent rally as the Fed is expected to resume rate hikes in its ongoing battle against inflation and markets look for breadth to support performance that has been driven by a handful of mega cap companies.

Inflation, the Fed, and Recession Predictions

Inflation metrics exhibited further progress towards the Fed’s 2.0% target. After peaking around 8.0% year-over-year during the middle of 2022, recent readings have marked CPI around 4.0% with expectations for continued declines into the second half of 2023 and 2024. Energy prices and new/used vehicles, which were key contributors to high inflation readings a year ago, have normalized and recently been net detractors to monthly headline CPI in some cases. The difficulty for the Fed is that inflation remains above target and has remained sticky in places like shelter costs or shifted to service-oriented sections of the economy.

Given improving inflation numbers and an unemployment rate that has remained low at 3.7% among other factors, the FOMC voted to hold policy rates steady at their June 2023 meeting after ten consecutive hikes. An additional explanation for the pause is that the committee was wary to roil markets that had priced-in a pause based both on market indicators and comments from Fed governors leading up to their June meeting. Expectations are that this pause will be temporary. Comments by Chairman Powell and the committee’s dot plot suggest that the Fed will remain hawkish over the intermediate term and likely raise rates 1-2 more times before year-end. Interestingly, the market has yet to fully trust Fed guidance, with market-implied pricing suggesting that the Fed Funds Rate will remain at current levels before declining in 2024 and 2025.

The trajectory of rate hikes over the past several quarters has naturally led to predictions for a recession that has remained squarely on the horizon rather than the present. To be fair, recessionary indicators and signs of stress are flashing in some areas of the economy. The 3-month/10-year yield curve, often cited as a harbinger of recession, has been inverted for months. Leading economic indicators are in their longest streak of declines since 2008. Credit standards have tightened, bankruptcy filings have increased, and credit card delinquencies are in a prolonged upswing. On the flip side the aggregate consumer has remained strong and willing to spend and GDP estimates point to solid growth in the U.S. Recessions are a natural part of the economic cycle so predictions will be proven true at some point, but aside from an exogenous shock like COVID it is hard to see a recession in the short-term.

Continue reading by downloading the full report HERE which includes exhibits and sections that discuss:

  • Stocks Continue 2023 Rally
  • Bond Market Remains Volatile
  • In the Headlines: Commercial Real Estate and AI
  • Market Index Review – June 2023
  • Slowing Inflation Allows Fed to Pause Rate Hikes
  • 2023 Equity Market Strength Driven by Earnings Recovery
  • U.S. Equity Market Breadth Remains Very Narrow
  • Small Caps Get Smaller
  • International Stocks Poised to Rebound?
  • Emerging Markets: Historically Cheap (and Still Inefficient)
  • “Analysis of an Average Leads to Average Analysis”
  • Fed Pause vs. Fed Pivot
  • Will We See a Recession?
  • A Looming Credit Crunch?
  • Real Estate Update
  • Risks: Is Artificial Intelligence (“A.I.”) the Next Bubble?
  • Appendix: Private Markets Update

Sources in the report:

  • Morningstar
  • Hedgeye
  • Bloomberg
  • Federal Reserve
  • FactSet
  • Societe Generale
  • Coatue
  • Russell Investment Group
  • FTSE
  • JP Morgan
  • Morgan Stanley Capital International
  • MSCI
  • Rayliant Research
  • Standard & Poor’s
  • Charles Schwab
  • NY Federal Reserve
  • UBS
  • Google Trends
  • Bank of America
  • Pitchbook