Market Data for the Quarter Ending June 30, 2023:

  • S&P 500 Stock Index: 4450, up 8.3%
  • Ten-year Treasury Note Yield: 3.82%, up 0.33%
  • Gold: $1,920 per ounce, down 3.3%
  • Oil: $71 per barrel, down 6.6%

The S&P 500 continued its powerful rally in the second quarter of 2023, riding a tidal wave of Federal Reserve and Treasury supplied liquidity that was further supercharged by a textbook “New Era” hysteria centered on artificial intelligence (AI). Meanwhile, bonds sold off due to a creeping realization that elevated inflation will likely be sticking around, thus preventing the Federal Reserve from being able to go back to the good old days of “easy money.” Oil fell due to concerns surrounding the strength of the global economy, while gold felt the pressure of rising interest rates.

The bottom-line regarding the strength of the S&P 500 thus far in 2023 is that it has been driven overwhelmingly by a resurgence of speculation. The glamorous “Big Tech” stocks of the Nasdaq provided almost the entirety of the gains, with all other economic sectors of the market generating either single digit returns or outright losses. The tech bulls will tell you this is on account of Big Tech’s glorious AI-enabled future, but the inconvenient truth is that numerous money-losing companies without anything to do with AI and crypto “currencies” enjoyed powerful rallies, as well. As it is often said, never confuse genius with a bull market. If you listen to the financial media, there is currently plenty of that going around.

In keeping with popular adages, ignorance is also bliss until it isn’t. The underlying fuel for this bout of intense speculation has been a surge in market liquidity due to the Fed’s rescue of West Coast regional banks following the bankruptcy of SVB in March and the Treasury spending money without replenishing its coffers to remain under the debt ceiling, which was raised early last month. Both phenomena are now running in reverse, particularly regarding the Treasury, with heavy issuance of long-term debt that directly competes with stocks set to hit the market later this summer. Meanwhile, on account of inflation that continues to run well above their 2% target, the Federal Reserve will unlikely be able to offset the Treasury’s debt issuance with more “Quantitative Easing,” as it has repeatedly over the past fifteen years.

The upshot of this is that we expect the Big Tech stocks that have dominated the rally in the S&P 500 year to date will stall and begin to decline, while the high-quality dividend growth stocks that make up the bulk of your portfolios will rally, as erstwhile tech geniuses come to appreciate (once again) the virtues of getting paid a sober, yet steadily growing return on their money. Relatively volatile “cyclical” shares, meanwhile, may struggle with an economy that is settling back into a lower growth regime regardless of whether a recession is avoided in the months ahead.

For the remainder of 2023, we see the market, as represented by the S&P 500 stock index, trading in a range of 4000 to 4700 (currently standing at 4450), with weakness in Big Tech being partially offset by relative strength in “value” stocks.

As always, we appreciate the confidence you have invested in us with your business, and please do not hesitate to contact us if you have any questions regarding your investments.