Second Quarter 2023 Review and Outlook
Written by Tim Rigby
The second quarter showed improvement although it was not across all sectors. According to The Wall Street Journal, the indexes posted returns as follows:
Quarter YearThe Dow Jones Average 3.41% 3.80%
The S&P 500 8.30% 15.90%
The NASDAQ Composite 12.81% 31.70%
Although the popular indexes have positive returns this year, the rally is lopsided in favor of the NASDAQ index. The lopsided nature is due to the top ten largest tech stocks accounting for most of the growth in the market. It is reminiscent of the “Nifty 50” stock market of the 1970’s in which the top 50 stocks made up much of the growth in the markets before their vast underperformance over the next decade. While some of these companies subsequently recovered, the big lesson for investors is to not concentrate portfolios too heavily in high growth stocks as it can bring undue risk.
Most client portfolios are well diversified so most will trail the more heavily concentrated indices for now. We see inordinate risk even in some index funds as they have large positions in these high-growth stocks. It does look like the rally may finally be starting to broaden and many sectors seem very underpriced at this point. It seems like non-tech stocks are priced as if we are at the bottom of a recession so if we do avoid a recession, there could be a very strong rally in these underpriced sectors.
The economy seems to be handling much higher interest rates as best as possible. Most sectors are still growing although growth has slowed. The Federal Reserve did not raise short-term interest rates at their last meeting as they opted to give prior hikes more time to work. Things happen with a lag. Inflation peaked a year ago but has moderated as the earlier rate increases start to bite. Inflation should continue to decrease, but the Federal Reserve may bump short rates a little higher to make sure. Their long-term target is a 2% rate of inflation so the current 4% rate is still too high in the Fed’s judgment.
Although the COVID pandemic is over, it takes time for all the distortions created to work their way through the economy. The unemployment rate is very low so that is great news. There are jobs available for those looking for work. But – is work from home here forever? How will that affect commercial real estate down the road? How will that affect bank loans or the bond market? It could take years for these significant changes to work themselves through the system.
As we have mentioned, TD Ameritrade and Charles Schwab are merging later this summer. You should receive more information about the merger over the next few months. The biggest change for clients is the website will change over the Labor Day holiday weekend. Until then nothing changes but come September 5 everyone will need new login credentials to access your accounts on the Schwab website. Watch for instructions for this in particular! Please keep in mind that our relationship with clients will not change. Please call us as you always have with any questions or issues that come up.
Have a great summer and please call with any financial questions or concerns.
Tim Rigby