A Look Back
Depending on how you really define the word “magic” I kind of do believe. It’s hard not to with current markets in the sense that things can truly surprise us in the face of what we have known as reality…or at least in thinking about what expectations would be based on history and what we have actually seen take place. The title above comes from a hit song from the band Lovin Spoonful. It was released in 1965 and shot up the charts and became a top 10 hit on Billboard’s Hot 100. Additionally, it was ranked #216 on Rolling Stone’s list of the 500 greatest songs of all time. It has also been featured in many movies, including The Parent Trap, American Pie and Date Movie. In hearing it recently, it occurred to me that in this context, this year’s rally in the stock market has been nothing short of magical. The Big-Cap S&P 500 returned 3.21% in July, which puts it up over 20% for the first seven months of the year. Dare I say that you would have had to look long and hard to find any market player that was predicting anywhere near that kind of move at the beginning of 2023…and that includes me. But, in some ways, it is the beauty of our financial system. We have all this information, and we can get it so quickly now, but in the end, it doesn’t really guarantee any specific prediction. The truth is that when people want to take risk, they do…and markets go higher. When they don’t want risk…like in the very early stages of Covid, and most of 2022, they don’t…and markets go lower. So far in 2023, risk has been on. Small-Cap domestic stocks are up over 13% for the year and International Developed equities are more than 15% higher. The asset class that has really been disappointing over the last year and a half has been Core Bonds. Historically, bonds have acted as a consistent portfolio diversifier for clients. Generally, when stocks go down, bonds have acted as a great ballast for overall client performance…zigging when stocks zag. That was not the case in a big way in 2022 when bonds delivered a -13% return. The asset class has stabilized in 2023 and has delivered a 2% return, but still not near the longer-term average. In addition, many of the key economic releases in July were positive. Inflation, as measured by CPI, continues to trend down with a 3% year-over-year reading, as energy declined by over 16%. The employment situation has remained amazingly strong, as the U.S. added 209,000 jobs in June and the unemployment rate ticked down to 3.6%.
A Look Ahead
So, now what? Well, July’s Jobs report was just released, and Nonfarm payrolls increased by 187,000 jobs and that 209,000 number in June was revised down to 185,000, as the actual unemployment rate fell to 3.5%. We’ve said before that you just don’t see recessions with the overall unemployment rate so low. It is one of the economic indicators that can change quickly if employers decide to tighten their belts further, and it bears watching. As expected, the Fed increased the Fed Funds rate another .25% in July, it’s 11th hike in the last 16 months. It now stands at a healthy 5.25-5.50%. It cannot be ignored that short-term rates at these levels represent a real alternative to investors. It is still possible/likely that a recession will come calling over the next several quarters, but also a real chance that it can be fairly benign. For now, we maintain our slight underweight to Stocks and overweight to Cash. Further, we believe that bonds as an asset class will perform well over the next several years as interest rates normalize. Until then, “believe in the magic that can set you free”…or at least be good for markets!