July 2023 Market Update

The first half of 2023 is officially in the books.  So far, we’ve seen an explosion in all things AI, a regional banking crisis, and last month the Fed finally paused hiking interest rates.  After 10 consecutive rate hikes, it’s a welcome breather as inflation has come down notably.  We’d like to think it’s possible the “pause” is actually a “stop” but the Fed seems determined to keep rates higher for longer so we may see more hikes still to come. 

Which brings us to the markets and the incredible run they’ve had this year.  The NASDAQ is up over 30% YTD which is the best first half of the year in over 40 years!  Conventional wisdom says the tech-heavy index should be going the opposite direction in a rising-rate environment but as for now, 2023 had other plans. 

At the close of the market on Thursday June 9th the S&P 500 was up 20% from the lows of October 2022.  Technically speaking, that marks the beginning of a new Bull Market and, if so, puts to rest what has turned out to be the longest Bear Market since the 1940’s!  (For those counting, 248 trading days to be exact.) 

Or did it?   

Economists and talking heads on TV will debate for the coming weeks if this truly is the end of the bear or just another fake rally.  (Spoiler alert: We don’t have the answer…yet).  Anyone who’s followed the markets for the past year know we’ve been stuck in a range of volatility, up 10-15% only to turn around and give it right back.  It’s certainly been frustrating for investors, and we certainly wouldn’t blame you for celebrating the end of the bear and start of something better.   

That said, (I promise we’re not about to rain on the parade…well maybe we are) we have mentioned for several months just how few stocks have actually carried this rally.  We won’t rehash that but will point out that the S&P 500 is up +15% YTD while the equal-weighted S&P is only up 5% and the DJIA is only up 4%.  The disconnect is significant but is finally starting to broaden, albeit slowly.   

For perspective, allow us a bit of history: The Dot-Com Bubble crash of 2000 experienced 3 separate rallies of more than +20% only to fall again each time.  It wasn’t’ until 3 years later (yikes!) when the markets finally stabilized, and the real bull market began.  And the Great Financial Crisis of 2008 saw the markets jump +27%, only to turn around and drop -29%.  At some point a +20% rally will mark the beginning of a new bull market.  We just have to remember, it’s not every +20% rally that starts the bull market. 

Maybe the bigger lesson to be learned so far this year is nobody actually knows anything.  And I promise we don’t say that to be cynical; actually, quite the opposite.  Smart investors recognize that they don’t know the future.   Last summer, was anyone talking about AI?  Or were they talking about the market crash, inflation at 9%, the Fed hiking rates and a recession coming?  Smart investors know they can’t time this.  Coming into the holidays last year, how many people saw a rally taking shape?  And this is all ok!  We don’t have to know everything.  We only have to know one thing, but it’s an important one: diversification works.  Period.   It keeps us from just chasing tech stocks and getting caught in a bubble.  It also keeps us from just sitting in cash and missing a market rally that defied the news headlines.  Diversification may be boring and old fashioned but sometimes being boring is ok too. 

 

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