Second Quarter 2023 Update
August 1, 2023
Key Points
- The FOMC, in its continuing effort to tame inflation, raised its federal funds rate target range by 0.25% in the quarter, to 5.00% to 5.25%, from a range of 4.75% to 5.00%.
- Even though growth was positive for the third consecutive quarter, the rate of growth has declined in each of the past two quarters as the economy grapples with still-elevated inflation and the rising interest rate environment initiated by the Federal Open Market Committee (FOMC) to subdue the inflation.
- Stock prices were mostly higher in the quarter following the first quarter’s mixed results.
- In terms of equities, the rise in stock prices this quarter was not entirely expected and indicates that investors may be anticipating a better earnings environment going forward.
2cd QUARTER 2023 MARKET COMMENTARY
Below, we’ve highlighted 2023 broad market returns for the current quarter and year-to-date time periods:
Index | Q2 2023 | Year-to-Date |
S&P 500 | 8.7% | 16.8% |
Russell 2000 | 5.0% | 2.7% |
MSCI EAFE | 3.2% | 8.6% |
MSCI Emerging Markets | 1.0% | 4.0% |
S&P Real Assets Equity | -0.3% | 1.0% |
Barclays Muni 5 Year | -0.4% | 1.8% |
Source: Refinitiv
THE GLOBAL ECONOMY
The US economy slowed in the first quarter of 2023 in a sign that economists say indicates growth will continue to be weak for the remainder of the year. Even though growth was positive for the third consecutive quarter, the rate of growth has declined in each of the past two quarters as the economy grapples with still-elevated inflation and the rising interest rate environment initiated by the Federal Open Market Committee (FOMC) to subdue the inflation. Within this context, the Bureau of Economic Analysis released the third estimate of the first quarter 2023 real GDP, a seasonally adjusted annualized rise of 2.0%, higher than the prior estimate, but a decline from the 2.6% increase in the prior quarter. The employment situation continued to be a bright spot for the economy in the quarter. The May employment report showed that employers added 339,000 jobs in the month, and that the unemployment rate was slightly higher at 3.7%. The FOMC, in its continuing effort to tame inflation, raised its federal funds rate target range by 0.25% in the quarter, to 5.00% to 5.25%, from a range of 4.75% to 5.00%. The FOMC has paused its rate hikes, at least temporarily, but analysts expect the committee to begin raising rates again at its July meeting.
EQUITIES
Stock prices were mostly higher in the quarter following the first quarter’s mixed results. However, as in the first quarter there was a significant amount of dispersion in returns, with certain sectors advancing more than 17%, while others declined more than 2%. The economy’s resiliency has surprised many investors and analysts, and the strength in stock prices seems to be suggesting that the US economy may avert a recession. For the first several weeks of the quarter the S&P 500 remained in a relatively narrow trading range. The index then began to trend higher in the latter part of May when investors began to believe the FOMC would pause its rate increase program, and topped out in mid-June. When the quarter ended, the S&P 500 Index had advanced 8.7%, the Russell 2000 Index, underperformed large caps, and finished the quarter with a total return of 5.2%, the MSCI EAFE Index of developed markets stocks was higher by 3.0% and the MSCI Emerging Markets Index rose by 0.9%
FIXED INCOME
The FOMC raised the federal funds rate target range once during the quarter – at its March meeting – to a range of 5.00%-5.25% from 4.75%-5.00%. Fixed income securities’ prices were generally lower (and yields higher) during the quarter, as the bond market continued to grapple with high inflation and the FOMC’s attempts to keep it under control through higher interest rates. After raising the federal funds target rate once during the quarter, the FOMC paused its increases to let the economy adjust and to determine the committee’s next steps. The pause interrupts a string of 10 consecutive FOMC meetings where rates were increased since January 2022. Despite not raising rates in June, the FOMC is widely expected to resume its increases again at its meeting in late July. The committee expects the fed funds rate to end the year at 5.63%, approximately 0.50% higher than current levels.
SUMMARY
The global economy is having difficulty finding its footing. Having survived the tumult caused by the pandemic, the economy is now being buffeted by the headwinds of tighter monetary policy resulting from central bank efforts to bring down still-elevated inflation. Economists anticipate that global GDP will slow to an estimated 2.2% in 2023, below the 3% rate of 2022. At this point, the consensus among economists is that the economy will avert a recession, but circumstances could change very quickly. Inflation continues to be stubbornly high, and though the rate has eased from its peak the FOMC is expected to resume interest rate increases again in July. FOMC policymakers estimate the target fed funds rate will end 2023 at 5.63% before declining in 2024. The situation in areas outside of the US is also murky. Europe seems to have also averted a recession, and sentiment in the euro zone and the UK is beginning to trend higher. China’s growth has also accelerated after it abandoned its zero-COVID policy, but its economy has a heavy reliance on the property market. In terms of equities, the rise in stock prices this quarter was not entirely expected, and indicates that investors may be anticipating a better earnings environment going forward.
Information provided is for informational purposes only and should not be construed as investment advice. The views expressed are current only as of the publication date, are based on information that St. Clair Advisors believes to be accurate, and subject to change without notice. All investment decisions must be evaluated as to whether they are consistent with your investment objectives, risk tolerance and financial situation. St. Clair disclaims any liability for any direct or incidental loss incurred by applying any of the information in this publication. Indexes are unmanaged and one cannot invest directly in an index. Past performance is no guarantee of future results.
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