Q2 2023 Market Commentary

July 27, 2023

The markets continued their recovery from the lows in early October 2022. Over the last 9 months ending June 30, 2023, U.S. large-cap stocks are up 25% and U.S. small-caps are up 15%, according to the Russell indexes. International stocks returned nearly 32% over the same period. Higher interest rates have led to bond returns of 4% in the US and nearly 3% in foreign sovereign debt securities, with current yields in the Bloomberg Barclays US Aggregate Index at 4.8% and high-quality corporate bonds at 5.5%. ASI’s dedicated exposure to US growth stocks has contributed to portfolio returns in 2023. Large tech stocks such as Apple, Amazon, NVIDIA, and Meta are all in ASI portfolios, with year-to-date returns of 49.7%, 55.2%, 189.5%, and 138.5%, respectively. Despite the temptation to lean into large tech even more, we remain disciplined and focused on diversification. We remember the large tech burst in 2019 and 2020, and the subsequent market-leadership rotation to value and small-cap stocks in the following two calendar years. Despite the rebound in stocks and bonds over the last three quarters, the headlines of a looming recession are casting a shadow over the market.

The University of Michigan’s Consumer Sentiment Index is a monthly telephone survey designed to measure how US consumers feel about the economy, personal finances, business conditions, and buying conditions. It has been conducted since the 1940s and is considered a leading indicator of future economicactivity. The index reading for June was 64.4. Although this is a leap from where it was just a year ago at 50.0, an all-time low, it remains well below the average. In fact, the current reading is lower than 92% of the monthly readings since 1978.

But let us focus on the facts. First, this index’s calculation is based on the consumer’s opinion, which, on average, tends to be an emotional interpretation of their situation. Emotions should not dictate investment decisions. Second, the last year is a prime example of why this index is not a leading indicator of marketreturns. A year ago, the index was at an all-time low. Since then, the US stock market, as measured by the Russell 3000 Index, has appreciated 19.0%. Further, international stocks, according to the MSCI EAFE Index, grew by 19.4%. There has been a disparity between consumer sentiment and actual market data over the last year. One could argue that the disparity remains. Sentiment is currently low, as noted above, but there are several positives in the market data ASI tracks. The June reading of the Consumer Price Index, the most common measurement for inflation, cooled to an annual rate of 3.0%, which is the lowest rate since March 2021. The unemployment rate fell to 3.6% in June, just missing the 53-year low of 3.4% measured at the beginning of 2020. Wage growth continues to be a headwind for corporate earnings coming in at 4.4% in June, but this is down from its peak of nearly 8% in the spring of 2020.