The Market is Up, But Why Aren’t We Celebrating?

June 2023



We’ve reached the halfway point of 2023, summer is upon us, and we hope good weather, travel, and backyard barbecues are in everyone’s near future.

The broad market continues to surprise to the upside:  The Russell 2000 is up over 6%, the All Country World Index up over 12%, the S&P 500 over 14%, and the NASDAQ Index is partying like it’s 1999.  So, why aren’t we more optimistic?  Or, as a client recently asked me, “Chuck, the market is up, why aren’t you happier?”

We are always pleased when the market goes up, but we think the market hasn’t fully priced in challenges and potential headwinds that lie before us.  Hence, our somewhat cautious attitude.

[ Chart 1: 1:01 ] We have noted many times that this has not been a broad market rally.  Last month, I mentioned that the seven “Tech Titans” were responsible for almost all of the S&P 500’s year-to-date (YTD) return.  That trend continues.  New bull markets have traditionally been broader with greater participation and outperformance from smaller constituents. 

[ Chart 2: 1:25 ] This chart expands on that point by illustrating the returns of the 11 sectors in the broad market since the October lows.  A lopsided bull market, indeed, with just three sectors providing “happy” returns.  Four are negative.  The growth value discrepancy is notable, and seasoned investors are well aware of historical reversion to the mean.  Further, dividend stocks, standout outperformers in the dismal 2022 landscape, haven’t joined the rebound rally and now appear to trade below fair value. 

[ Chart 3: 2:02 ] We are not quite ready to declare a new bull market.  We question the rally’s sustainability given that first, when it comes to Macro risks, our recession odds are 78%, above consensus; however, we still forecast a mild recession.  Second, prospects for weaker than expected earnings results. In fact, we forecast earnings for S&P 500 companies to be negative in the second half of 2023.  Further, valuations suggest this rally may be ahead of itself, driven more by multiple expansion than earnings growth.

[ Chart 4: 2:40 ] We are relatively more optimistic on fixed income, both core and higher yield bonds, with yields driving returns as the bond markets recover from a difficult 2022.  Based on current yields, we expect returns to exceed averages through the end of the year, across the fixed-income risk spectrum.  Shorter-term liquidity strategies continue to look attractive, as well.

In summary, we are pleased when the markets are up, but it is in our DNA to assess the current and future environment and identify potential risks.  We think the stock market is not pricing in recession risks, valuations are high, and the returns have been driven disproportionately by just three growth sectors, especially technology. Therefore, we remain cautious and expect above-average volatility as the market reconciles with economic reality.



NASDAQ Index: National Association of Securities Dealers Automated Quotations Stock Market

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