As we come to the end of the 2^nd quarter and end of the 1^st half of 2023 the stock market has surprised many who predicted a coming recession and down year for the market in 2023. Year-to-date the S&P 500 is positive 16.89% and the tech-heavy Nasdaq is positive by a whopping 32.32%. Bonds are also positive as the Bloomberg US Aggregate is up 2.09% year-to-date. For June, the S&P and Nasdaq had similar returns up 6.61% and 6.65% respectively. Interest rates did not change much during the month; thus, the Bloomberg US Aggregate was relatively flat, down 0.36%. International equities also continued their positive trend with the MSCI EAFE Index positive 4.55% for the month and 11.67% year-to-date.

The positive returns came in a somewhat different fashion in June than the previous 5 months. From January through May, growth led value, large caps led small and mid caps, and technology led all other S&P market sectors, but all of these trends reversed in June. The S&P 500 Value Index was positive 6.88% for the month, leading the S&P 500 Growth Index which was up 6.38%. The S&P 400 Mid Cap Index was positive 9.16% and the S&P 600 Small Cap Index was positive 8.23% and both were well ahead of their large cap counterpart as the S&P 500 returned 6.61% for the month. After leading the S&P Market Sectors month after month, the technology sector was up 6.59% but that trailed the return of the consumer discretionary sector which was positive by 12.07% for the month. Technology also trailed the Industrials and Materials sectors which returned 11.29% and 11.05% respectively.

The fact that consumer discretionary is performing so well (33.06% year-to-date) helps to show the strength of the consumer as Americans continue to spend on travel and leisure. Another positive economic sign is that GDP growth for the first quarter was revised upwards to 2.0% and the Atlanta Fed GDP tracker is estimating that the second quarter GDP will come in at 2.2%. The labor market continues to be strong as well with wages continuing to rise and unemployment remaining at a very low 3.70% with initial unemployment jobless claims dropping by 26,000 in the most recent reading, the biggest drop in 20 months. This all leads to the consumer confidence index rising as Americans are feeling more optimistic about their current financial situation and about the economy as a whole.

With the Fed raising rates over the last year and a half you would expect there to be ongoing suffering in the housing market as mortgage rates are more than double where they started 2022. And there was some suffering in 2022 after mortgage rates were a lot higher than the past several years when rates were incredibly low. The average 30-year mortgage rate has now been above 6% since September of 2022, which helped to cool off the red-hot housing market. The Case-Shiller Home Price Index showed that in April home prices fell year over year for the first time since 2012 coming in at -0.28%. But it does appear that there is a rebound in the home buying market as home buyers have seemed to have settled into the “new normal” for mortgage rates as mortgage applications rose 3% for the week of June ending on the 24^th. Mortgage applications have risen for 3 straight weeks driven by new home purchases, up 12% in May compared to April. These new home builds are sorely needed to bring the housing supply into better balance with demand. Consumers being more willing to apply for mortgages with rates more than double is an interesting development as motivated buyers desperately search the limited supply of homes for sale.

With these economic positives, you may be wondering if there are there any concerns and if there are economists still predicting a recession. Recessions predictions for 2023 are starting to fade or are at least being pushed off to 2024. However, the wild card in these predictions remains the Federal Reserve and their ongoing rate hikes which were put on pause at their recent June meeting. This pause came after 10 straight hikes coming out of their 10 previous FOMC meetings. All these positive economic signs may give the Fed and Chairman Jerome Powell leeway to hike rates even further to stamp out the remnants of the inflation crisis and finish the job of getting inflation back down to their target of 2%. In June both the Consumer Price Index (CPI) and the Personal Consumption Expenditures Index (PCE), two of the most watched measures of inflation, fell with CPI coming in at 4.05% off its high of 9.06% a year ago and PCE fell to 3.85% off its high of 6.98% from a year ago as well. Falling CPI and PCE readings could give the Fed time to pause for longer and allow higher interest rates to continue to drive inflation lower. However, it appears that Chairman Powell has set expectations for additional rate hikes which could possibly lead to taking rates beyond what is necessary and put a damper on the positive economic signs being reported so far this year.

The first half of 2023 is another example of why staying the course and not trying to time the market based on investor sentiment and expectations is so important. Only about 26% of investors had a positive view of the market going into the year, based on the AAII US Investor Sentiment Index. That positive sentiment number is now up to 42% at the end of June coinciding with the S&P 500 being up 16.89% for the first half of 2023. Once again, it is important to stay that course, stay invested and make sure the course is designed for your unique individual investment needs.

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