A First-Half Market Phenom

The first half of 2023 is over after today’s closing bell, and what a first half it was!

After a very bearish 2022 that saw the S&P 500 lose some 19% of its value, stocks have made a rather robust rebound through the first six months of this year, with the benchmark domestic equity index on pace for a near-16% move to the upside.

Now, last year, stocks were down nearly across the board, but the declines were particularly deep in tech and other high-beta sectors. This year, we’ve seen a huge reversal of fortune in tech, and particularly mega-cap tech stocks such as Amazon (AMZN), Apple (AAPL), Alphabet (GOOGL), Meta Platforms (META) and Nvidia (NVDA).

The heavy market-cap weighting in the Nasdaq Composite of these mega-cap techs, and of course their big moves higher, helped vault the index up more than 31% year to date. The chart here of the major domestic averages year to date tells the tale of a tech-fueled rally that looks to me like it wants to continue much higher.

The question now becomes: What’s going to happen in Q3?

While I’m tempted to borrow a line from the great Bob Dylan and say, “The answer, my friend, is blowin’ in the wind,” I will refrain here and give you what I think you’ll find as a much more substantive response.

The way I see it, as we begin the third quarter, the outlook for stocks and bonds is arguably the most positive it’s been since late 2021. Think about this: inflation has just hit a two-year low, economic growth and the labor market remain impressively resilient, the Fed has temporarily paused its historic rate hiking campaign, the debt ceiling extension is resolved and we’ve seen no significant contagion from the regional bank failures from earlier this year.

This improvement in the fundamental outlook has been reflected in both stock and bond prices in 2023, as the S&P 500 hit the best levels since last April. Moreover, cyclically focused sectors led markets higher late in the second quarter on rising hopes for a broad economic expansion.

All of these positives augur well for a continued rally. And while clearly the past quarter brought positive developments in the economy and the markets, it’s important to remember that potentially significant risks remain. Put bluntly, the market has taken a decidedly positive view on the ultimate resolution of multiple macroeconomic unknowns, but their outcomes remain very uncertain and thanks to the strong year-to-date rally in stocks, there is now little room for disappointment.

Keep in mind that the economy has not yet felt the full impact of the Fed’s historically aggressive rate hikes. And while the economy has proven surprisingly resilient, we know from history that the impacts of rate hikes can take far longer than most expect to impact economic growth. That means it is premature to think the economy is “in the clear” from recession risks, and we should all expect the economy to slow more as we move into the second half of 2023. The key for markets will be the intensity of that slowing, as at these valuation levels stocks are not pricing in a significant economic slowdown.

There’s also the fact that markets are trading at their highest valuation in over a year, and investor sentiment has become intensely optimistic. For example, the CNN Fear/Greed Index ended the second quarter at “Extreme Greed” levels, while the American Association for Individual Investors (AAII) Bullish/Bearish Sentiment Index hit the most bullish level since November 2021, right before the market collapse started in early 2022.

Positive sentiment does not automatically mean markets will decline, but the sudden burst of enthusiasm needs to be considered in the context of what is a still-uncertain macroeconomic environment and markets no longer have the protection of low expectations and valuations to cushion declines

So, while clearly there have been positive macro developments in 2023 that have helped the stock market rebound, it’s important to remember that multiple and varied risks remain for the economy and markets—and being highly tuned to these risks while also putting our money to work in the best stocks and ETFs the market has to offer is the mission of this service.

Finally, Tuesday is Independence Day, and as my friend Rich Checkan of Asset Strategies International and I were discussing earlier this week, as Americans we won the lottery of birth. And as Rich so beautifully put it, “I wouldn’t want to be from anywhere else.”

So, this pre-July Fourth weekend, which is serving as the unofficial weekend of Independence Day celebrations, I hope we collectively take less for granted and appreciate prior sacrifices from our Founding Fathers much more. In doing so, we might just shed a tear of appreciation for what they created and the gift they’ve given us all

P.S. Join me at FreedomFest, “the world’s largest gathering of free minds,” just a month away! I, along with my fellow Eagle Financial gurus, Mark Skousen, George Gilder and Bryan Perry, will be speaking. The full agenda — speakers, panels, debates and breakout sessions — is now posted online. Go to www.freedomfest.com/agenda to check it out. You will be amazed! You can also click on the name of each presenter to see when and on what topic they will be speaking. Click here to find out more. When registering, use the code EAGLE50 to receive a discount. I hope to see you at FreedomFest in “Music City,” Memphis, Tennessee, July 12-15.

P.P.S. Come join me and my Eagle colleagues on an incredible cruise! We set sail on Dec. 4 for 16 days, embarking on a memorable journey that combines fascinating history, vibrant culture and picturesque scenery. Enjoy seminars on the days we are cruising from one destination to another, as well as dinners with members of the Eagle team. Just some of the places we’ll visit are Mexico, Belize, Panama, Ecuador and more! Click here now for all the details.