AE Wealth Management Quarterly Market Report for Q2-2023

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Markets Charge Upward Despite Sluggish Economy in Second Quarter

After gaining momentum in the first quarter, the S&P 500 and Nasdaq ended the second quarter up 20% from October’s lows, officially exiting bear territory. Markets have moved consistently up over the first half of the year, despite a slowing economy and continued uncertainty about a possible recession.

Will the much-talked-about recession come to pass? The data is mixed. Inflation dropped to 4% in May¹ after the Federal Reserve raised interest rates again in April and May, taking the fed funds rate to the 5%-5.25% range.² These rate hikes came even as data showed the economy was slowing in response to earlier increases: Gross domestic product (GDP) grew by a mere 1.3% in the first quarter, down from a 2.6% increase in the fourth quarter of 2022.³

Drama in the banking sector also continued to create economic uncertainty in the second quarter. Silicon Valley Bank and Signature Bank were shut down by regulators in early March, followed by First Republic Bank six weeks later. The closings triggered a sharp decline in bank stock prices and fears that the banking industry was headed toward a crisis eerily similar to the one in 2008 and 2009.

The debate around the debt ceiling was also a big market driver in the second quarter. Congress took the discussion about whether to raise the debt ceiling down to the wire, mere days before the U.S. would default on what it owed. Although an agreement was ultimately reached, it was just one more negative event for skittish markets.

Despite all this, the second quarter contained bright spots, most of which served to only muddle the conversation about a potential recession. The job market has remained stubbornly strong, with employers adding a stunning 339,000 jobs in May.⁴ And while unemployment rose to 3.7%, it’s still significantly below historical average rates.^5,6

Consumers also kept spending in the second quarter.⁷ But high levels of spending could come back to haunt people as credit card bills come due. By early June, Americans owed a record $988 billion in credit card debt, an average of $5,733 per adult.⁸

The banking crisis, strong spending and persistently low unemployment rates created a conundrum for the Fed entering into their June meeting. The dilemma: Should they raise rates once again in their quest to bring inflation down to the target 2%? Or pause rate hikes for now in the face of declining inflation and plateauing prices?

In the end, the Fed chose to stay put and not raise rates for the first time in over a year. But officials made it clear this isn’t the end of their battle against inflation, saying, “The committee is strongly committed to returning inflation to its 2% objective.”⁹ The Fed’s comments seem to suggest that this pause may be more of a skip — and that additional rate hikes are still on the table for 2023.

Even with the caveat, markets liked the Fed’s decision. The S&P 500 immediately responded by surpassing 4,300, a level last seen in December 2021.¹⁰ The market’s upward momentum has many talking about a new bull market as we head into the third quarter.

A Market Environment in Flux

Can investors expect more growth and less volatility in the next few months? It won’t be clear how much economic growth slowed (or accelerated) over the past three months until second-quarter GDP data is released in late July. Until then, we can only examine the data in front of us — and the data is still inconclusive about whether a smoother road lies ahead for investors.

The Fed wants to see jobs and spending softening further before they put a definite hold on rate hikes or even consider rate cuts. This could happen soon, particularly as consumers stop spending once the credit runs out. The housing market is already broken, because people with low rates don’t want to sell and buy another home at an inflated price with double the mortgage rate.

Although fears of a more widespread banking crisis have been mostly assuaged, some additional banks may be vulnerable to closure. Those with money tied up in lower-yielding, longer-term securities will be keeping an ultra-close eye on their books as long as the Fed keeps interest rates high.

Looking Ahead

Even with all these uncertainties, we are optimistic about the second half of the year and hopeful that, if a recession does happen, it will likely be mild and short-lived. There will likely be unforeseen twists and turns over the coming months, but we think markets should continue on their upward trajectory.

However, it may not be time quite yet to shift from a bear-market to a bull-market mindset. Short-term events could continue to rattle markets in the months ahead, especially as we inch closer to the 2024 presidential election.

If you haven’t done so lately, we recommend reviewing your financial plan with your advisor and revisiting your investing goals. You’ll want to be well positioned to take advantage of potential market growth or preservation against a potential recession, and the time to take those steps is before these events occur.

SOURCES

¹ Bureau of Labor Statistics. June 13, 2023. “Consumer Price Index – May 2023.” https://www.bls.gov/news.release/pdf/cpi.pdf. Accessed June 14, 2023.

² Bankrate. “Fed Funds Rate.” https://www.bankrate.com/rates/interest-rates/federal-funds-rate/. Accessed June 14, 2023.

³ Bureau of Economic Analysis. May 25, 2023. “Gross Domestic Product.” https://www.bea.gov/data/gdp/gross-domestic-product. Accessed June 14, 2023.

⁴ Scott Horsley. NPR. June 2, 2023. “The U.S. added 339,000 jobs in May. It’s a stunningly strong number.” https://www.npr.org/2023/06/02/1179621886/jobs-employment-employers-labor-market-economy-recession-inflation. Accessed June 14, 2023.

⁵ Bureau of Labor Statistics. June 2, 2023. “The Employment Situation – May 2023.” https://www.bls.gov/news.release/pdf/empsit.pdf. Accessed June 14, 2023.

⁶ Trading Economics. “United States Unemployment Rate.” https://tradingeconomics.com/united-states/unemployment-rate. Accessed June 14, 2023.

⁷ Lucia Mutikani. Reuters. May 16, 2023. “US consumer spending appears solid early in second quarter.” https://www.reuters.com/markets/us/us-retail-sales-miss-expectations-core-sales-strong-2023-05-16/. Accessed June 14, 2023.

⁸ Cheyenne DeVon. CNBC Make It. June 9, 2023. “Americans owe nearly $1 trillion in credit card debt – here’s the breakdown by age.” https://www.cnbc.com/2023/06/09/how-much-credit-card-debt-americans-hold-by-age.html. Accessed June 14, 2023.

⁹ Scott Horsley. NPR. June 14, 2023. “Taking a breather: Fed holds interest rates steady in patient battle against inflation.” https://www.npr.org/2023/06/14/1181946330/taking-a-breather-federal-reserve-holds-interest-rates-steady-inflation-battle. Accessed June 14, 2023.

¹⁰ Yahoo! Finance. “S&P 500 (^GSPC).” https://finance.yahoo.com/quote/%5EGSPC/. Accessed June 14, 2023.

The opinions in the preceding commentary are for general information only and are not meant to be predictions or an offer of individual or personalized investment advice. They also are not intended as an offer or solicitation with respect to the purchase or sale of any security. This information and these opinions are subject to change without notice. Any type of investing involves risk, including the loss of principal, and there are no guarantees. AE Wealth Management, LLC does not assume liability for any loss which may result from the reliance by any person upon any such information or opinions.

The advisory firm providing you this report is an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives. Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and advisory firm are not affiliated companies.

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