Monthly Market Update - July 2023

Highlights:

• The S&P 500 Index advanced 6.6%, but the narrowness of the market continued. Roughly 200 of the 500 stocks are negative for the year, despite a +16.9% index return.
• After some flattening in prior months, yield curve inversion intensified in June, with 2-year Treasury bonds yielding 100 basis points more than 10-year bonds.
• The Federal Reserve skipped raising rates for the first time in a year; markets now expect one or two more hikes before year-end and are bracing for “higher for longer.”

At month end most of the Midwest was suffering under a blanket of wildfire ash and smoke, an apt climate for our sense of the economic and investing landscape. While visibility might have been clouded, investors continued to pile into stocks, with the S&P 500® Index rising 6.6% for the month, pushing the year-to-date return to 16.9%. Short-term bonds and money markets also attracted flows as yields pushed 5%. Optimists could cite resilient corporate earnings, robust housing starts and new home sales, strong employment numbers, steadfast consumer spending, and a slow but steady drop in inflation. First quarter GDP growth was revised upwards from an annualized 1.3% to 2%. The Federal Reserve contributed to the mood by skipping an opportunity to raise rates at their June meeting for the first time in a year.

A deeper look gives reasons for our sense of a more mixed outlook. The narrowness of the market continued. Close to 200 of the 500 stocks in the S&P 500 didn’t keep up with the average and are negative so far this year. A few hot technology stocks continued to carry the load, even with extended valuations. While new homes were being grabbed, existing home sales were sluggish as homeowners balked at abandoning existing, low-rate mortgages. New home sales were also concentrated on the high end, only emphasizing the bifurcation in fortune between top earners and the bulk of Americans struggling with the impacts of inflation. Consumer spending, constituting 70% of the economy, appeared to be fueled by dwindling household cash reserves as the bubble of savings stowed during the Covid crisis headed back towards modest, pre-pandemic levels. Another sign of household budget strain: rising levels of credit card debt. Add the consensus likelihood of another Fed rate increase in July with one more possible before year end.

All of these factors lead to our cautious stance on equities, although we continue to see opportunities in the bond market. The sharply inverted yield curve is just one of the historical predictors of an impending recession. The prospect of even higher interest rates, a consumer base with dwindling spending capacity, and a Fed that has explicitly stated the job market will be impacted as it attempts to return inflation towards its 2% targets through restrictive monetary policy all point toward the possibility of rougher times ahead.

Some of these contradictory indicators will eventually resolve, and we should have a clearer perspective on the future. In the meantime, we believe the best course is prudence as we manage through the remainder of 2023 and into 2024.