Second Quarter 2023 Market Perspective

The U.S. economy continues to hold its own on the strength of consumers who are feeling confident as inflation declines and jobs stay plentiful. The June unemployment rate remained a low 3.6%. The unemployment rate has now remained between 3.4% and 3.7% since March 2022. Inflation continued to recede in the second quarter, dropping to 4% in May from 4.9% in April according to the Consumer Price Index.

Still looking to bring down inflation further, the Federal Reserve (the Fed) increased its Federal Funds interest rate by a quarter of a percent in May to the 5.0-5.25% range. The Fed’s most recent meeting in June, it opted against an increase in rates for the first time in 11 meetings. Fed Chairman Powell though, indicated that they still expected to hike rates a couple more times to get inflation closer to their goal of 2%.

Congress made things interesting for the bond markets in May as it jousted over raising the government debt ceiling. Yet again, the government managed to agree on an increase and narrowly avoid defaulting on its debt payments. Not surprisingly, Treasury bonds were also down 1.26% for the quarter according to the Morningstar U.S. Composite Government Bond Index. Overall, the bond market lost 0.8% in the second quarter per the Morningstar U.S. Core Bond Index but is up just over 2% for the year.

2022 was a tough year for technology stocks but the flurry of news about artificial intelligence over the past few months has sparked a rally that has erased the last year’s poor performance. That rally has powered large cap stocks overall and led to their outperforming small caps. Year to date, large cap stocks are up 17.78% compared to 10.77% for small cap stocks per Morningstar Large Cap and Small Cap Indices. Overall, the U.S. stock market was up nearly 8.5% in the second quarter and is now up 16.5% for the year per the Morningstar U.S. Market Index.

Outside the U.S., international stocks were up approximately 2.75% for the quarter and are up over 9% for the year per the Morningstar Global Markets – ex U.S. Index. The Chinese economy has continued to underperform expectations in the months since the government lifted its Covid controls. In June, the Chinese rate of inflation fell to 0% indicating weak demand throughout the economy. As a result, the Chinese stock market lost over 9% in the second quarter as measured by the MSCI China Total Return Index.

The Fed Funds rate is an interest rate the Federal Reserve charges banks to borrow from it for very short periods of time. The Consumer Price Index measures the change in the cost of living by tracking the prices of a basket of consumer goods and services.

The Morningstar U.S. Core Bond Index represents the performance of a portfolio consisting of U.S. Treasury, mortgage-backed, and corporate bonds with a term of approximately 5 years to maturity. The Morningstar U.S. Treasury Bond Index measures the performance of U.S. Treasury bonds with maturities greater than one year. The Morningstar Large Cap Index represents the largest stocks equal to 70% of the total U.S. market capitalization. The Morningstar Small Cap Index measures the performance of small company stocks that fall between the 90^th and 97^th percentile in market capitalization.  The Morningstar U.S. Market Index comprises 97% of the tradeable universe of stocks in the U.S. The Morningstar Global Markets – ex U.S. comprises developed and emerging market large cap stocks outside the U.S.

The opinions expressed in this article are those of  author and should not be construed as specific investment advice.  All information is believed to
be from reliable sources; however, no representation is made to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Diversification does not guarantee investment returns and does not eliminate the risk of loss. Indices are unmanaged and do not incur fees, one cannot directly invest in an index.

Investment Advisory Services offered through Boulay Financial Advisors, LLC a SEC Registered Investment Advisor.