Economic Outlook July 2023

WHAT’S GOING ON?

From estimates at the end of last year, we should be at the early stages of an economic slowdown by now – yet there is nothing along those lines in sight. So here we are today, wondering if economic slowing is still on the horizon or if it is no longer a probability. First-quarter gross domestic product (GDP) was revised higher from 1.3% to 2%, and unemployment remains low. Personal consumption, personal confidence and personal income are up, and even new home sales are doing well.

The stock market seems to be trading with the mindset that prospects for a recession have diminished, if not dissolved all together – but a deeper look suggests that thinking is not unanimous. Our past two outlooks highlighted how the returns in popular indexes, like the S&P 500 and the NASDAQ 100, are very top-heavy, with the largest companies accounting for all of the investment performance year-to-date. At this writing, the S&P 500 is up 14.98% year-to-date. However, if the largest seven companies are removed from that performance, the year-to-date return is -3.72%.

What does this all mean? Our interpretation is that liquidity has played a large part in year-to-date performance, with the most dollars going into the largest companies. Exciting themes such as artificial intelligence have also been contributors to the performance of these largest companies. Another interpretation is that investors favor companies that will not have a problem accessing capital markets even if the economy begins to slow. Capital in the form of bank loans, debt issuance, lines of credit or stock issuance is easy to come by for these largest companies. With the other 493 companies in the S&P 500 down -3.72%, capital constraints for those organizations could turn into earnings pressure and ultimately some stock price pressure (but not necessarily in that order).

The bond market seems to be validating the prospect for a slowing economy. The yield curve inversion, where short-term interest rates are higher than longer-term interest rates, points to the idea that investors want the protection that comes with bonds in a contracting economy – and are willing to purchase longer-term bonds, even though yields are below the current inflation rate.

We had the good fortune to participate in the market performance year-to-date by staying focused on long-term goals rather than short-term noise. We still feel that bond, stock and real estate returns will trend closer to long-term averages. Stock performance so far this year signals that at least that portion of the market could finish 2023 ahead of longer trend averages.

We remain on guard, watching for indications about the future direction of the economy. It’s hard to believe that rising Fed Fund interest rates won’t ultimately affect economic growth. At least for now, markets and investors seem to be taking everything in stride.

Thank you for your confidence in Bell.