Mid-Summer 2023 Invesment & Economic Commentary

Mid-Summer 2023 Invesment & Economic Commentary

by - Thomas Twombly

artist - Daisy Lopez

As we pass the midpoint of the year, it seems that more than a few outspoken market prognosticators have been caught by surprise that stock markets across the board have rallied substantially. The brutal recession that many had vociferously forecast as the inevitable result of rising interest rates has failed to materialize, and instead we’ve witnessed fairly resilient indications of continuing growth.

In fact, the U.S. Commerce Department released data in the first week of July that demonstrated that the U.S. economy expanded at a faster pace than had originally been estimated for the first quarter of 2023, and it’s now on track for a 2% annual growth rate instead of the 1.3% previously reported.

Furthermore, consumer spending remains quite strong. The overall job market continues to expand at a healthy pace, despite pockets of weakness. And with inflation still on the rapid decline, and with burgeoning excitement about technological advancements and the use of “artificial intelligence” enabling productivity growth in all kinds of companies, equity markets have responded very positively.

In the grand scheme, especially when viewed against the profoundly negative consumer sentiment we first pointed out at in our Quarterly Report of this time last year, which can be found in the “Resources” section of our newly refurbished website www.lsggroup.com , even slightly better results than the worst-feared outcomes often lead to dramatic reversals in financial markets. This is why it is so important for long-term investors to remain patient and disciplined in their approach during trying times.

As you will note from the chart of General Market Results after this paragraph, the equanimity we counseled back then towards equity holdings has clearly paid off. Since this time last year, when the University of Michigan Consumer Sentiment Index hit its all-time low of 50.0 in its 52-year history, the S&P 500 has risen by +19.6%, the NASDAQ index has risen by +26.1%, and the MSCI EAFE (Europe, Asia, Far East) Index of International stocks has risen +18.8% in US dollar terms. Small and mid-sized US stocks have also rallied by +12.3% and +17.6% respectively since last June 30th, with especially strong results of +8.1% and +9.2% coming in the final month of the recent quarter as market strength has shown signs of broadening to include more than simply the largest technology companies.

Fixed income markets have continued to struggle overall, as rising short-term interest rates and worries about inflation have persisted, in spite of growing evidence that many of those pressures continue to decline. The Barclays US Aggregate Bond index has managed a +2.1% gain for 2023 so far, but still sports a negative total return of -.94% for the last twelve months.

As you can also see from the updated chart of the Consumer Sentiment Index below, and as Dr. David Kelly, the Chief Global Strategist for J.P. Morgan pointed out in a recent webinar, despite the significant bounce from last year’s lows, the mood of the general public as reflected in this particular survey is still gloomier than it has been 92% of the time since it originated in 1971, while the overall economic data being reported now is better than it has been 83% of the time.

Exactly why this remains the case is not entirely clear, and precisely how the current economic situation eventually resolves itself still remains to be seen. It’s certainly possible that a recession of some type could still be over the horizon – though to us a recession is beginning to look increasingly doubtful, or perhaps increasingly mild if it were to occur.

It’s possible that the deep negativity we’re still seeing reflected in this data is a completely understandable vestige of the incredible volatility, uncertainty, complexity, and ambiguity we have all been forced to endure over the last several years. Certainly, the media and the political world continue to beat a drum of profound anxiety and fear, and people are just worn out. We also suspect that the eventual results of what we termed “the extension cord effect” in our June 2022 newsletter haven’t yet been recognized by the majority of our population. We’d encourage you to read that posting again and stay tuned, because the outcome we proposed back then is appearing more probable by the day.

https://www.lsggroup.com/articles/2022/2/26/presidents-message-rlktm-rhhrb  

For additional perspective, see the chart below and recall that that article was posted a few weeks before the blue line at the far right reached its absolute tippy top. In other words, just as the Headline Consumer Price Index was approaching its apogee, before rolling over into the vertiginous plunge we have witnessed since – similar to what happens as a “wave” of energy passes down an extension cord.

As always, we remain broadly diversified, focused on the far horizon, and convinced that patience, discipline, and a long-term faith in the future will again prove to be the keys to success. If you have questions about your personal situation, or if you would like to discuss our perspective in a one-to-one conversation, we welcome the opportunity. Please give us a call.

Thomas G. Twombly

President