Outstanding First Half. Do We See a Market Upswing or a Fade During the Rest of 2023?
“Extraordinary magic follows you around
and the camera can’t catch it,
you won’t see it in the mirror
but I see it, I see it…
I see extraordinary magic in you.”
—Lyric from “Extraordinary Magic”
Nasdaq & S&P 500 Advance
It’s very hard to come up with a phrase to describe the first six months of 2023 other than “Wow!” That’s a wow in the most positive sense. It was rather magical. The S&P 500 price has advanced 16% year to date through June 30 and is up 24% since its October 12, 2022, closing price low when bearish outlooks were rampant.1 Skeptics trumpeted the risk of “long duration” tech stocks and warned investors to avoid them. Fortunately, we kept our heads down and focused on the facts as the tech-laden Nasdaq Composite Index advanced over 30% in the first two quarters of 2023 and produced its best results in more than four decades going back to 1980.2 We are gratified that we implored investors not to abandon high-quality growth stocks within technology. We encouraged them to maintain a blend of growth and value and not to bite on the idea of shifting solely to more cyclical value stocks that were the outperformers of 2022.
Positive Economic Trends
Importantly, the economic data and associated financial market metrics trended well and improved throughout the period. We didn’t limp into the locker room at halftime. As we thought, the challenges at Silicon Valley Bank and several other select banks in March were handled deftly by government regulatory agencies and did not lead to a broad credit meltdown. The debt ceiling debate was adequately resolved. Inflation continued to trend in a less-worse fashion and calmed in a manner consistent with our expectations, allowing the Federal Reserve to begin to signal that much of its work is complete. It is true that policymakers have raised rates swiftly and significantly but only back to normal or average levels on a historical basis. The Fed may employ a couple more 25-basis-point hikes, but it appears to be in the eighth or ninth inning of its monthly policy adjustments and has not taken us to punishingly restrictive levels.
Can the Market Advance Be Trusted?
Last but not least, on the skeptics list of reasons to be bearish, many have emphasized the narrow leadership in the S&P 500 and pointed to this as a sign that doom and gloom is right around the corner and as evidence that the advance this year is not to be trusted. In fact, those championing this argument have implied that only the largest eight stocks in the S&P 500 are in positive territory this year, and the other 492 stocks have underperformed. This simply is not true. The market was far broader than appreciated earlier in the year, in our view, with quite a few stocks and industry groups performing well and contributing to strong S&P 500 returns. Further, leadership broadened out significantly in May and June. All 11 S&P 500 sectors were in positive territory in June, the equal-weight S&P 500 handsomely outperformed the market-cap-weighted index and the industrial stocks have put on quite a charge lately, etc.3 So, it wasn’t just a handful of the largest tech stocks doing well while all else suffered. Once again, naysayers jumped immediately to worst-case outcomes on these various wall of worry issues, while the market saw better-than-feared results in the offing and marched forward in a resilient and broadening manner.
Signals That the Rally Is Real
What about that recession that was supposed to arrive in 2022 or 2023 or now potentially 2024? The data suggests clearly that if we do finally have one, it should be of the soft or mild variety. Just as importantly, the economic and earnings data was revised upward as we closed out the first half of the year. Employment payroll numbers remained solid, real gross domestic product growth for first quarter was revised up from 1.3% to 2.0%,4 consumer confidence meaningfully improved in the latest data and S&P earnings growth and profit margins are stabilizing and beginning to improve. These are all reassuring signs to us that this “rally” is real.
Our Year-end S&P 500 Target Holds Steady
We believe that we promoted a productive message during the sell-off in 2022 and have continued to do so throughout this early recovery in 2023. Beginning in January 2022, we recommended clients pare back their stock allocation to their normal long-term target if the robust returns of the prior three years had taken their stock exposure to well above normal. We suggested “holding your ground” at this normal or neutral stock exposure level. We have maintained our 4,500 price target on the S&P 500 by year-end based on our assessment of the fundamentals of the economy and capital markets, stock valuation and the technical price trends.
Positivity Trumps Skepticism
We saw upside to as high as 4,800 by year-end 2023 if everything fell into place in surprisingly positive fashion regarding these transitional issues in the economy and on the policy front. The bear camp had become uber negative going into 2023 versus the more benign backdrop suggested by the metrics. The skeptics also jumped to expectations of worst-case outcomes on major wall of worry items mentioned above. We embraced a view of more moderate resolution and trend on these issues. We are pleased that a less-worse trend in the data and more positive outcomes on policy issues prevailed than expected by this bearish camp in keeping with our relatively positive thesis for 2023.
Strategists Adjust Bearish Views
Is this a new bull or just a bear rally? That seems to be the question du jour. At midyear, many (not all) market strategists seem to be adjusting their bearish views and joining us in our more positive stance on calendar year 2023 results for U.S. equities. Headlines are touting a “new bull market” following the May/early June rally simply because the S&P 500 has now pierced the 20% minimum price return threshold (from the October 2022 low of 3,492 through the end of June 2023 price level of 4,450)5 to technically qualify as a young, new bull chapter. Certainly, the number of bullish investors has increased. According to the Association of Individual Investors, the percentage of investors who claim to be bullish has risen to 45% as of mid-June from a very low level of 23% just a bit ago on May 19.6
Our take on this? We try not to get caught up on labels. Time will tell if we indeed are in a decidedly new secular bull market.
Keeping an Eye on the Fundamentals
Our focus is more direct and straightforward. We constantly examine three levels of analysis in assessing our view of the market: fundamentals, valuation levels and the technical price trends. We call them the FVTs. Our purpose in scrutinizing the FVTs regularly is to evaluate whether we are positive, neutral or negative on stocks and to determine whether the stock market winds are to our back or in our face in the coming 12 months.
We simply strive to get the intermediate direction correct and hence align client portfolios accordingly. As I mentioned earlier, in 2019, 2020 and 2021, we were extremely positive on U.S. stocks and comfortable allowing an investor’s stock allocation to drift above normal, meaning above their neutral, long-term targets. Beginning in 2022, however, we became concerned about the many transitional issues facing the U.S. and global economy. We recognized these issues might cause heightened volatility and periods of temporary drawdown. This was confirmed by our downgrade of the FVTs to neutral from positive and hence our message to investors to rebalance and reduce their stock allocation to neutral from above normal in January of that year. For example, we suggested that if a normal 60%/40% stock/bond investor had seen their stock allocation rise to the 70% level going into 2022 due to the robust annual compounded returns in the prior three years, they should reduce it back to the 60% level and stay there.
We conveyed our hold-your-ground message then and still embrace it today. We believed it was important to recommend not reducing stock allocations below this level for this type of balanced investor unless life circumstances had changed, unlike recommendations from more bearish/negative-leaning strategists to significantly prune stock exposure and become more defensive during this transitional 2022 to 2023 period.
Similarly, we urged folks not to get more bullish in tone by raising targeted equity allocations nor employ a “buy on dips” mentality yet, despite our consistent 2023 year-end target of 4,500+ for the S&P 500. The table below illustrates the supporting data for this seemingly boring or neutral view that we have consistently espoused in this challenging 2022 to 2023 period of fluctuating investor sentiment.
|Fundamentals: Data that impacts revenues and earnings||Neutral|
|Federal Reserve Policy||O/–|
|Interest Rate Trends||O/+|
|Valuation: How expensive stocks are||Neutral|
|Price to Earnings||O|
|Dividend Yields vs. Interest Rates||O|
|Price to Sales||O|
|Earnings Yield to Bond Yield||O|
|Technical Price Trends: Quality of trend in market||Neutral|
|Stocks Above 200-day Moving Average||O|
|Sector/Individual Stock Trends||O|
Source: Mariner Wealth Advisors Equity Team – Metrics are ranked positive, neutral or negative based solely on the firm’s interpretation of market data, are subject to change at the firm’s discretion and are not a guarantee of future results.
Key Data Remains Neutral
The FVTs were and are decidedly neutral as they are most of the time. We have stayed glued to the data and the facts in formulating our hold-your-ground view throughout this period. On rare occasions, the FVTs can shift to more extreme positive or negative levels, where we make associated bullish or bearish adjustments in positioning. Our contrarian, extremely positive stances in 2018 and in 2020 serve as good examples. That said, these extreme reads are rare. Most of the time the data is neutral, as is our associated recommendation for investors to hover at their long-term normal equity allocation.
I hope this is helpful background information to address the question the equity team is getting often these days: “Jeff and team, when are you going to shift your hold-your-ground view to something more aggressive as we are getting ever closer to that January 3, 2022, high of 4,820 in the S&P 500?”7 Our answer: When the FVTs are decidedly positive and tell us to do so. I’ll direct a question at this reader audience: Why would you change your view to extremely positive or negative on any issue, personally or professionally, if all the data and supporting information was neutral? Clearly, it’s a rhetorical question, and I imagine we agree on the answer.
I find the lyrical excerpt from Ben Rector’s song “Extraordinary Magic” cited in the opening of this commentary to be analogous to the U.S. stock market so far in 2023. The returns were magical, but it is more than that. Ben, of course, is saying there are unappreciated and magical qualities of important people in our lives that can be missed unless you watch very closely. Only if you observe intently do you see these special qualities. What an epiphany is in store when you recognize them. Such insights and moments are long remembered and appreciated when they occur.
I think the U.S. economy and stock market exhibited some of their special qualities in 2023’s first half. The economy reaccelerated rather than falling prey to a recession that many have prophesized for some time, despite a soft residential housing market, a meaningful slowdown in the manufactured goods sector and the many and varied issues ranging from inflation to hawkish Fed rhetoric to war. How can this be? Perhaps our economy is simply more versatile than we recognize and process. Maybe we are experiencing rolling recessions in certain sectors of the U.S. economy during which pockets of weakness in certain areas are offset by pockets of significant strength in other subsectors. This contrasts with the old-time boom-bust recessions of times past characterized by significant credit meltdowns.
Our Chief Economist Bill Greiner likes to call these traditional boom-bust, hard-landing scenarios “balance sheet recessions,” where virtually every sector in the economy breaks at the same time. That’s not what we see today. Yes, residential housing is soft, but multifamily residential as well as nonresidential construction is on fire. Yes, manufacturing looks like it is taking recess, but the service sector is experiencing solid demand as consumers shift their spending dollars from buying home appliances, furniture and electronics during the pandemic to experiences today such as travel, lodging and dining out. Importantly, the services sector is far larger than the manufacturing sector. Finally, there’s a capital spending renaissance underway in the U.S. as deglobalization and infrastructure-related spending bills passed by Congress are incenting a reonshoring boom in the U.S. These factors and others are driving resiliency in revenues and earnings at U.S. corporations as we move through 2023.
At present, we find this recovery to be real for some of these reasons cited. That’s not to say that we won’t have a recession in coming months and quarters. We are not out of the woods yet regarding potential policy mistakes. We can’t give an all-clear signal on that key front yet, so caution is still warranted. That said, the FVTs are solid enough, and we’ve made enough progress on policy issues to establish a new base case target of 4,850 on the S&P 500 by June 30, 2024, with an optimistic target of 5,000 by then. We’ll cover this in detail in our 2023 Midyear Crystal Ball Outlook webinar on July 21.
For now, we’ll leave it there. We look forward to speaking with you then.
2“Stock Market News, June 30, 2023,” The Wall Street Journal
6AAII and FactSet
The S&P 500 Index is a market-value weighted index provided by Standard & Poor’s and is comprised of 500 companies chosen for market size and industry group representation.
The Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange.
The indexes are unmanaged and cannot be directly invested into. Past performance does not guarantee future results. Investing involves risk and the potential to lose principal.
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