It hardly seems it but we are halfway through 2023. Just as unbelievable is that the stock market is having a good year.
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Something for Every Investor!
The S&P500 is up just over 18%. The bond market has been ok too. There has been a lot of volatility in rates as traders hang on every economic report and every comment a Fed governor makes all in an effort to try to divine the future direction of interest rates.
The iShares Investment Grade Bond ETF (LQD ) is up almost 4% while this year’s return on the iShares 7-10 year Treasury ETF (IEF) is 2.14%.
We also should mention that the 1-year US Treasury note yields 5%.
There has been something for everyone in the markets this year. The very conservative can get 5% on safe US government paper and those taking risks have made money. This has been quite positive despite the rather negative sentiment that is portrayed in survey data and in parts of the media.
How Good an Indicator Is Share Price?
Share price action is often a better indicator of the real “story” than what you hear from analysts or the press. Share prices show that people are “putting their money where their mouth is.”
This is not to say that all is clear and well. The market has priced in a lot of optimism around inflation coming under control and optimism about AI as an investable concept. Critics of the market focus on how AI exuberance has caused a handful of companies’ stock prices to explode higher, making the market appear better than it is.
There is some truth to this. Microsoft, Nvidia, Google, and Meta are AI favorites and have big weightings in the S&P 500. The equal-weight S&P 500 ETF (RSP) is up just 8.7%. This is about 9 percentage points behind the S&P 500. For the market to continue to move higher this year, inflation needs to continue to moderate, corporate earnings need to hang in there and it would be constructive if the rally broadened out to more sectors than just technology.
Over the next few weeks, we will be getting earnings reports. The setup is not the best as the market has rallied into earnings season. We could have “sell on the news” type action or there could be outright disappointments.
We’ve had a good year so far, I’m not bearish but a little defense is not the worst tactical approach as we sort out inflation numbers and the profit picture.
Story to Watch: Inflation
Inflation will continue to be the story to watch as we move into the second half of 2023.
The June report showed a moderation of prices which was welcome and the stock market rallied. It is difficult to predict inflation for two reasons.
Multiple Variables Affect Inflation
The first is that there are so many variables that go into the calculation. Many of these, like used car prices and energy, can be volatile and in the case of energy subject to geo-political risks that can come out of the blue.
Multiple Inflation Indicators
The second is the inflation calculations themselves. Items are weighted in ways that may or may not truly reflect what happens in the real world. These weightings change over time based on calls made by the statisticians that are in charge of producing the figures. Small changes in items that have large weightings can produce outside moves. Similarly, large moves in items with small weightings also can exert undue influence on the numbers.
Then there is the question of which inflation indicator is the one to use:
- CPI,
- CPI-core,
- PPI,
- PPI-core, or
- PCE.
Each is calculated differently and each has its following.
>> See A trio of inflation indicators: CPI, PPI, and PCE
>> See Differences between the Consumer Price Index and the Personal Consumption Expenditures Price Index (pdf)
Messy Inflation Comparisons
In 2022 inflation rocketed upward and then came down. This will make year-over-year comparisons messy as the numbers in 2022 moved around a lot. Even if 2023 inflation prints are stable, the year-over-year change could vary.
Some inflation watchers are writing that since the 2nd half of 2022 saw a steady decline in prices, the comps are more difficult for the 2nd half of 2023 and that even if prices are steady or down slightly, it may still, on a year-over-year basis, show inflation rising.
Of course, what really matters is how the Fed interprets the data. Conventional wisdom says that it takes six months for a rate hike to be felt in the economy. If true, the tightening impact of the recent Fed increases has yet to be realized.
The fallout from the Silicon Valley Bank debacle has caused banks to tighten their lending and use of capital.
>> See Better Q1 2023 Earnings + Perspective on Banks
On the expansion side, the spending from the Infrastructure Act, Chips Act, and Inflation Reduction Act is just beginning.
Is It a Good Year? It’s Too Early to Declare Inflation Victory!
It is probably too early to declare victory over inflation and investors need to keep some powder dry in case we get a bad inflation number that creates a buying opportunity.
Thanks for reading.
>> Download the July 2023 Newsletter <<
Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. Investing involves risk.
Image Credit: View of the Golden Bend in the Herengracht, Gerrit Berckheyde, 1671 – 1672; oil on panel, h 42.5cm × w 57.9cm, Rijks Museum