The increasing confidence was supported by rising optimism on current economic conditions, with the present subindex hitting its highest level since the start of the Covid-19 pandemic during the month. While there is still work to be done to get headline confidence back to pre-pandemic levels, the improvements in July suggest that we’re on the right track.
Strong job creation in the first half of the year supported the rise in confidence that we’ve seen in 2023 so far. June’s employment report showed that 209,000 jobs were added during the month, which drew unemployment down to 3.6 percent and highlighted the strength of the labor market.
Perhaps the most impressive feature of the current economic expansion is the fact that we continue to see signs of solid growth combined with declining inflation. Annual consumer inflation fell to 3 percent in June 2023 after peaking at 9.1 percent in June 2022, highlighting notable progress in combating inflationary pressure over the past year.
Although the Fed did still announce a 25 bps hike at its July meeting, markets do not expect any further rate hikes for the rest of the year. While this outlook could certainly change if we see an uptick in inflation or notable weakness from the job market, in general, the Fed’s impact on the economy and markets may be set to swing from restrictive to supportive in the second half of this year or early 2024.
For now, inflation and the Fed will still be closely monitored by investors and economists given the importance of both for markets. But the developments we’ve seen on the inflation front this year are encouraging.
- July showed continually strong economic growth to start the second half of the year.
- Inflation also showed better-than-expected signs of improvement during the month.
Market Risks Fading
The first half of the year saw a number of risks negatively impact markets; however, most of the initial impact has since faded. The debt ceiling standoff at the end of May and start of June is a good example, as we’ve seen markets rally notably since the successful resolution of the standoff. Additionally, concerns around the banking sector have cooled notably since March, and markets have largely shrugged off the initial volatility associated with both risk factors.
Looking forward, there are still very real risks that should be monitored. Domestically, the primary risk is that inflation could spike again if growth continues to come in above expectations, which could lead to further unexpected rate hikes. While this does not appear to be an immediate concern given the recent progress we’ve seen in lowering inflationary pressure, it’s certainly possible and should be monitored as unexpected hikes could negatively impact both stock and bond valuations.
International risks remain, as evidenced by the ongoing war between Russia and Ukraine as well as concerns surrounding a slowdown in China. While the immediate market impact from these risk factors is limited, these are areas of potential concern that could lead to further uncertainty for investors.
Finally, there are also the unknown risks that we can’t predict at this time, which always have the potential to negatively impact markets.
- Inflation and the Fed are the primary domestic risks, although signs point toward continued improvements on the inflation front.
- International and unknown risks remain and should be monitored.
Strong Economy Supports Positive Outlook
Despite the real risks that markets face, the strong economy is a tailwind for investors. Better-than-expected economic news to start the second half of the year continued to paint a picture of a healthy economic expansion, which should support stock prices. With many primary risks from earlier in the year receding, the outlook for the rest of the year is positive for both markets and the economy.
Of course, while economic growth and market appreciation are the most likely path forward, there is potential for short-term disruptions. A well-diversified portfolio that matches investor timelines and goals remains the best path forward for most. As always, you should reach out to your financial advisor to discuss your current plan if you have concerns.
- Continued economic growth is expected to help support markets in the months ahead.
- Over the long run, the outlook remains positive, with potential for short-term setbacks.
Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, director, fixed income, at Commonwealth Financial Network®.
Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The Dow Jones Industrial Average is computed by summing the prices of the stocks of 30 large companies and then dividing that total by an adjusted value, one which has been adjusted over the years to account for the effects of stock splits on the prices of the 30 companies. Dividends are reinvested to reflect the actual performance of the underlying securities. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index. The Bloomberg US Aggregate Bond Index is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities with maturities of at least one year. The U.S. Treasury Index is based on the auctions of U.S. Treasury bills, or on the U.S. Treasury’s daily yield curve. The Bloomberg US Mortgage Backed Securities (MBS) Index is an unmanaged market value-weighted index of 15- and 30-year fixed-rate securities backed by mortgage pools of the Government National Mortgage Association (GNMA), Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Mortgage Corporation (FHLMC), and balloon mortgages with fixed-rate coupons. The Bloomberg US Municipal Index includes investment-grade, tax-exempt, and fixed-rate bonds with long-term maturities (greater than 2 years) selected from issues larger than $50 million. One basis point is equal to 1/100th of 1 percent, or 0.01 percent.
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