Q3 Market Intel Report | Episode 7

In this episode, Dave Alison will reflect on the first half of 2023 stock market performance, but more importantly, talk about what's going on in investors' minds as we look at the second half of the year.

The three major themes we discuss are:

👉What contributed to the resiliency of the economy and markets in the first half of 2023?

👉Has the Fed done enough to address inflation?

👉Will the economic strength continue in the second half of 2023?

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http://bit.ly/Q3MarketIntel

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The information provided in this presentation is not intended to be individual investment advice or legal advice.  The information provided is for informational and training purposes only.

Investment advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). For a detailed discussion of PCA and its investment advisory fees, see the firm’s Form ADV and Form CRS on file with the SEC at www.adviserinfo.sec.gov. The views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.

All data provided, including any reference to specific securities or sectors, is provided for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation, or recommendation to purchase any security. Consider your investment objectives, risks, charges and expenses before investing. These views are as of the date of th

Advisory services are provided through Prosperity Capital Advisors LLC (“PCA”) an investment advisor registered with the United States Securities and Exchange Commission (SEC). Views expressed herein represent the opinions of PCA and are not intended to predict or depict performance of any particular investment.

All data provided, including any reference to specific securities or sectors, is provided for informational purposes and should not be construed as investment advice. It does not constitute an offer, solicitation, or recommendation to purchase any security. Consider your investment objectives, risks, charges and expenses before investing. These views are as of the date of this publication and are subject to change. Past performance is no guarantee of future performance.

Transcript

Dave Alison, CFP®, EA, BPC:

Hello everyone and welcome to our Q3 Market Intel Report. I'm Dave Alison and I'm happy to be joining you today to share a little bit of insight as we look forward through Q3 and the rest of the year. To kick things off, I just want to share that the first half of the year, we know we've been off to a great start in light of a lot of headwinds that we've experienced, primarily driven through the resiliency of consumer spending and job stability. We saw that the S&P 500 returned over 8% while the technology heavy NASDAQ Index, which experienced the largest drawdown last year, recovered over a whopping 30% for the first half of this year.

Now, in light of great stock market returns, we certainly overcame a lot of headwinds and adversity. Over the last 18 to 20 months, we saw over 500 basis points of interest rate hikes as the Fed has been tightening monetary policy. We saw inflation hitting a 40-year high, two of the largest bank failures in history. And last but not least, fortunately, we overcame the threat of a United States default on our government debt. Now, if you look back six to eight months ago and thought, hey, is this a good time to be in invested in the market? If I told you all of those things were in front of us, you probably would've said no. But the reality of it is, the stock market and the economy are not the same thing. And this continues to show that companies, which comprise the stock market, continued to find ways to navigate their way through this uncertain economic environment.

So what I want to do now is really spend some time talking about some of the key themes that are on the minds of investors today, some of the things that we're looking at, which, number one is what can contributed to the resiliency of the economy and the markets in the first half of 2023. Number two, has the Fed done enough to address inflation? Is it finally in the rear view mirror? And number three, will the economic strength continue in the second half of 2023?

So let's jump right onto the first topic here, the overall economy and what drove a lot of this market and economic resiliency through the first half of 2023. And as you've heard me say in these intel reports in the past, it's all about jobs. It's all about jobs, because at the end of the day, if consumers feel stable and secure in their jobs, they're going to continue to go out there and spend money even in the face of higher inflation. And what we've continued to see is unemployment rates are near a 50-year low, hovering at just under 4%. We've also seen that not only is unemployment way down, wage growth has continued to be fairly strong with the average hourly earnings up over 5% year over year from last May to this May.

Again, when we see the inflation rate, at least the headlined inflation rate of an average of about 4%, again as June read came in at 3%, and we see wage growth at 5%, this still shows that consumers are confident in their ability to go out and spend. Spending drives the economy, it powers the earnings of these companies, and it allows us to continue to show a lot of resiliency in the stock market. So we've got unemployment at historic lows, we've got real wage growth, above headline inflation. We have consumer spending staying strong. And last but not least, another topic I've been talking about in these meetings, we have great business fundamentals. We have solid corporate fundamentals. Many companies were able to capitalize on the low rate environment we were in over the last few years by refinancing and extending their debt, and balance sheets are pretty healthy. So these are all good positive signs of future economic growth and development and stability.

Now, turning the page to inflation and the Fed's fight on inflation. We've seen that inflation continues to ease, but rates are expected to remain higher for longer. We saw inflation top out at about 9.1% in June of 2022. And the latest read of headline CPI, or inflation, came in at just around 3% in June of 2023. So the tightening cycles have been working, it has been bringing inflation down. Now, one thing to look at is when we look at core inflation, which excludes food and energy, we've seen that area continue to be stickier. That really encompasses services. We haven't seen service inflation come down as much as energy and food. And the biggest component of services is shelter. We still see shelter becoming sticky, but we're starting to make some progress.

The June inflation read was just under 5%. So again, positive news in inflation coming down. But when we look at the Fed's action and fight on inflation, we saw that in June they paused raising interest rates for the first time since May of 2022. But I think that the reality of it is, it's not necessarily a pause in raising interest rates as much as it is a skip. We believe, and the market believes, that the Fed is going to continue to raise interest rates just looking at some of the uncertainty of being able to bring down that core inflationary number. The market is anticipating at least two more 25 basis point rate hikes. And then they believe that the Fed, at least where market expectations are today, is that interest rates are not going to come down until sometime in the later part of 2024.

Again, market expectations were that interest rates might start to come down as late as the end of 2023, but now that forecast is being delayed. And so it is going to take time to see how that trickles through the economy and the overall markets. And so, again, we believe having a balanced approach during this time of uncertainty is the best course of action.

The last thing I want to talk about is some of the risks that remain as the economy may begin to slow, and we might start feeling this tighter policy from the Fed. A couple data points to look at here are that weekly jobless claims have been trending upwards. Of course, more jobless claims mean less people working, less people earning wages, less people out there spending. That could be a trigger for some sort of recession into the future. The second is that the rate of employees quitting their current job is falling. And what that tends to tell us is that they're not looking for new opportunities. Companies aren't enticing them with higher offers or better jobs, and employees don't have the confidence they had 6, 7, 8 months ago to go and quit their current job knowing that they could easily pick another one up. And again, when you introduce that type of uncertainty to an economy, it starts to create uncertainty in the consumer's appetite to go out and spend their money. And so that's something to keep an eye on.

The other is that banks are continuing to tighten their lending standards. There was a survey done amongst major banks that said they've increased their lending standards by about 46%. So again, if less banks are lending money to businesses, less businesses have money to go and deploy investment, and that could continue to slow down the economy. The other thing that we've seen coming is that student loan payments are going to resume in the near term. There was a three plus year moratorium on student loan repayment, and that is going to resume through the latter part of 2023. Again, if consumers are allocating more of their wages to repaying student loan debt, that's less that they can go out and deploy into the economy. So those are some things that could continue to lean towards some future uncertainty in the economy. And again, things to keep an eye on.

But I want to end this session with a couple positive outlooks for equities and for the market. The first thing is, and I've said this over and over in these market intel reports, a recession does not necessarily mean negative years for the stock market. This slide shows that if we just look at the most recent six recessions that we experienced, in 50% of them, the stock market returned positive performance, and in 50% of them, the stock market returned negative performance. So it was kind of a flip of a coin, whether we had a positive year for stocks or a negative year for stocks. But one thing that we know is if we look one year after a recession is declared, there's only been one time period in the last nine or 10 recessions that we actually experienced negative stock market returns, and that was back in 2001.

If we zoom out three years after a recession, every time we've had positive returns in the market. And so we really encourage everybody to continue to have a longer term outlook when they think about their money when it comes to trying to navigate what's going on in the economy and the potential for a recession. We've typically seen that we have great recoveries following the end of a bear market. And so we're officially out of bear market territory. The S&P 500 has recovered more than 20% since the bottom of the market in 2022. And this data shows that if we look at different one, five, and 10-year periods following a maximum drawdown in the stock market, that the future performance has been fantastic and it's rewarded those who have had the patience and discipline to ride out the downturns and not panic or make bad decisions with their asset allocation.

This last slide I want to touch on is a pretty interesting statistic because it shows what stock market returns have been following a period where money market assets peaked. And so money markets are a pretty safe and stable place to park cash and cash equivalents. And right now, we're seeing money market rates at a very competitive interest rate. Some money markets are paying upwards towards 5%. And so again, consumers might think, well, why would I want to be in the stock market? Why don't I just take my 5% for money market? And what this chart here shows is we look at the last four time periods where money market rates peaked out. So right now, we're at an all time high of assets in money markets.

As of May of 2023, there was over $5.4 trillion in money market assets. In May of 2020, there was over 4.8 trillion. That's the last time we hit an all-time peak. In January of 2009, after the great financial crisis or during the great financial crisis, we saw money market rates peak at over 3.8 trillion. And in January of 2003, we saw money market rates peak at over 2.3 trillion. And so if we look at stock market returns after a money market peak, we saw that starting in January of 2003, we entered into a great bull market. We saw annualized performance of over 16.4% from 2003 to 2006.

When we saw money market rates peak in 2009, we experienced annual performance of over 19.2% from 2009 to 2012. When we saw money market rates peak again in 2020, and then we look at the stock market performance. The stock market, at least the US stock market delivered almost 13% average annual performance from 2020 to 2023. And here we are again at a new era of money market assets peaking, and so if history is any indication, and again, there's no guarantees of future performance, but if we look historically over these last four periods, we've seen that when money market rates peak, it generally meant very strong future annual performance for US stocks. And so again, this is a great encouraging data point to remain the course to be able to deploy capital in the stock market during times of overall economic uncertainty, because historically, it has rewarded the long-term investor.

So I'll close out with that. I thank you so much for joining us for this Q3 Market Intel Report, and if you have any questions, please reach out to your advisor. Thanks a lot and have a great day.

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