August 16, 2023

Have Fears of a Possible Recession Been Pushed Out?

Following one of the most challenging years for equities in more than a decade, stocks have rebounded sharply in 2023 as investors have celebrated better-than-expected corporate earnings, resilient economic data, and decelerating inflation. In contrast to more cautious sentiment earlier in 2023, fears of a possible recession have been pushed out as investors have become more confident in the labor market’s durability and the economy’s ability to withstand higher interest rates.

In late July, Fed Chair Jerome Powell said a soft landing has long been his base case, and his confidence in it had grown. “We’ve seen so far the beginnings of disinflation without any real costs in the labor market,” he told reporters after the Fed’s policy meeting. “That’s a really good thing.”

What should investors expect now?

With July in the books, the equity markets delve into a historically slow period for U.S. equities (at the index level at least).

According to the Pre-Election Cycle, if the S&P 500 is going to take a breather, this would be a perfectly logical time in the cycle to catch its breath. As you can see, the current S&P performance (red line) has followed the seasonal trend (blue line) closely over the trailing year. If it continues, it will mean flat prices for the S&P 500 into the back half of the year.

This would make sense as rotation moves down the market cap scale into value-oriented cyclical sectors. Mega-cap technology stocks have been the resounding leaders, posting the strongest first half in 40 years. Now known as the “Magnificent 7” (Nvida, Tesla, Meta, Apple, Amazon, Microsoft and Google), this group has grown more than $4.1 Trillion in market value this year. The market cap of these 7 companies is greater than the bottom 240 companies within the SP500. Looking ahead, we believe the companies that stand to benefit from the reshoring and infrastructure movement are not necessarily the mega-cap tech names, but possibly the overlooked small and mid-cap industrial stocks benefiting from the capital expenditure movement. Let’s keep in mind the massive $1 Trillion Infrastructure Bill passed by Congress last year.

As we close out this August update, I want to end with some advice from the late Kobe Bryant, “Never Get Bored With The Basics”. The basics include:

  • Understand your own risk tolerance and invest accordingly.
  • Maximize your return on cash balances.
  • Remain Diversified.
  • Think Long-term.
  • Stay committed.

I hope everyone enjoys the remaining HOT days of Summer 2023.

 

Paul Massey, MBA, CFP®

Managing Partner

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The S&P 500 is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.

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