Q3'23 Market Update

July 25, 2023

Inflation is down, the market is up… but what happens next?

June CPI recently came in at 3%, the lowest level of headline inflation since Q1 2021.  The disinflationary trend has gained momentum since last summer when CPI peaked at 9.1%.  Lower inflation was widely expected given the aggressive policy shift and interest rate hikes by the Federal Reserve, but the results played out more quickly than anticipated.  As a result, the stock market has rebounded from 2022 lows at a rapid pace and renewed skepticism surrounds the reliability of recent economic data.  Some believe we may even be headed toward rising inflation again by the end of summer. 

The Fed paused rate hikes in June following three consecutive 25bps hikes to start 2023, another positive for the stock market.  The pace at which stocks have rebounded, especially growth stocks, has been remarkable; something very few, if any, analysts accurately predicted coming into 2023.  The S&P 500 has increased over 18% Year-to-Date, and the technology-heavy NASDAQ Composite has increased over 35%.  The graphic below depicts returns broken out by Year-to-Date size and style.  As you can see, “large growth” is most responsible for the rally.  Stocks like Apple, Nvidia, Google, and Meta have led the charge.  This is a far cry from the “low single-digit returns led by value” widely predicted at the beginning of the year by banks, economists, and market analysts alike.

(CPI data, S&P500 data, & NASDAQ data source: Bloomberg LP)

YTD Size & Style Returns

(Source: JP Morgan Asset Management)

What’s Next?

  • Two more 25bps rate hikes before year-end.
    • Over 90% chance of a 25bps rate hike after the July meeting is currently priced in.
    • Continued high interest rate environment relative to the last decade. (see fixed income yields chart below)
  • Headline inflation is likely to increase due to rising energy prices.
    • Record-high national temperatures, summer travel, and reduced supply are likely all to push energy prices higher, likely increasing headline CPI.
  • Continued “soft-landing” headlines as investors and economists weigh lower inflation and frothy 1H returns.


What’s the Impact?

  • Lower single-digit +/- returns predicted for the remainder of 2023.
    • Unlikely probability of double-digit returns, especially in the already inflated technology growth sectors.
    • All year the market has traded on forward hope of falling inflation. Now that we have reached that point of 3.0% CPI, we anticipate the market beginning to cool off.
  • Sector rotation.
    • We anticipate value to rebound in this scenario, bringing stability to any downward trajectory. 
    • Overweight in value, dividend payers, and non-cyclical sectors.  
  • Fixed income rallies as interest rates peak.    
    • The term “soft landing” continues to prop up even the riskier areas of bond markets, as defaults have continued to be historically low, despite the early year banking crisis, which somehow now feels like a distant memory.
    • Rates will peak once the Fed is done hiking, which will lead to a rally in fixed income pricing.

 

(Source: Bloomberg LP)

The information is provided solely as general investment education. None of the information should be regarded as a suggestion to engage in or refrain from any investment-related course of action. The information herein has been obtained from sources believed to be reliable, but we do not guarantee its accuracy or completeness. The views and opinions expressed in this article are those of the author and do not necessarily reflect those of B. Riley Wealth Advisors Inc. Opinions are subject to change with market conditions. Past performance does not guarantee future results.