The past few months have brought some major obstacles, some of which have since been muted. We started with the failure of some of the most prominent regional banks in the country, leaving everyone on edge as we waited to see how far the contagion would spread. Though earnings came out better than expected for most of the banks, and fear has largely abated, it is still not safe to say we are completely out of the woods; this rapid increase in rates has led to a tumultuous environment in the space, and in an age where money can move with the click of a button, any word of weakness can leave banks insolvent in a matter of hours. We then moved on to the debt crisis, which many feared would lead the US into default. Turns out increasing the national debt by 50% in the last five years to over $31 trillion has an effect. Well, somewhat – for as is customary, both parties heroically came to an agreement to simply suspend the debt ceiling. Even more front of mind has been the looming threat of a recession…Though the threat has been constant, another quarter has passed and there is still no major global recession. Inflation has remained higher and stickier than central banks would like, and, thus, we have continued to see rate hikes. We did have a brief pause in June, but the optimism tied to the end of this tightening was short-lived as the Fed quickly assured us that there were more hikes on the way.

Through it all, equity markets have proved resilient. The S&P 500 was up over 8.3% for the quarter, led largely by the Nasdaq which was up 12.8% followed by the Dow, up 3.4%. These indices are up 14.7%, 30.6%, and 2.3%, respectively for the year. A strong pickup in soft-landing expectations seemed to be among the most powerful tailwinds, as we continue to see a relatively strong economy in the face of unprecedented tightening. The labor market has remained resilient and nonfarm payrolls have beat expectations 14 straight months. It is important to remember that the economy will take time to reflect the full effects of such tightening, but after nearly 8 months, one would expect the cracks to be bigger than they appear now. After finishing 2022 down nearly 20%, many expected markets to continue their downfall. At the start of the new year, investor sentiment was low, and it continued to dip as the bad news piled up. For 7 months now, investors have waited (and some with lots of cash on the sidelines) for the “big drop” while the market steadily climbed upward. This is a great time to remind everyone of two truths about the stock market: 1. It is a leading indicator – it often identifies the storm before it is upon us, as seen by its putrid performance last year in a fairly favorable environment, but it also sees the sunshine well before the economy feels its rays. 2. “The stock market is never obvious. It is designed to fool most of the people, most of the time,” an apt quotation from the original Wolf of Wallstreet, Jesse Livermore: It has certainly done that this year so far.

Everyone will be right at some point if they hold their convictions for long enough. The market will go up, and it will go down. When you look under the hood at the performance this year, it is clear that this market has been very top heavy. Narrow market leadership has emerged as a prominent bearish talking point in Q2. According to Goldman Sachs, through the end of June, the 15 biggest companies in the S&P 500 have driven more than 86% of the return in the US year-to-date. The biggest 7 positions in the S&P 500, which account for more than 22% of the index, are up 44%, 38%, 53%, 191%, 118%, 32%, and 146%. With the S&P up a respectable 15% for the year, it is clear that there are plenty of laggards that offset these massive gainers. Though lack of market breadth does not necessarily lead to negative future performance, I think everyone would welcome a bit of sector rotation as a signal of sustainable strength.

The question many are asking is “what’s next?” Will the economy be able to endure these further restrictions long enough to see inflation come down to the acceptable levels? Will inflation prove entrenched? Will the cracks in the economy grow sizeable enough to force a retreat in rates? In the short-term, these questions will continue to remain and weigh on investor sentiment. The CPI number that was reported July 12 does give hope for a soft-landing, but we still have a long way to go. We will continue to navigate the lagged effects of tightening monetary policy, the steep yield curve inversion, collapsing money supply growth, earnings risk from dampened operating leverage, high valuations, and looming liquidity headwinds. Whether this period truly is sunshine on the other side of the storm or simply the eye of a larger storm we do not know. We expect volatility to reappear, and perhaps in an aggressive way, but the last 6 months should be our reminder to remain invested even when the public shouts otherwise – “buy on the cannons and sell on the trumpets.” Short-term may bring its challenges, but over time, patient investors will find success.

John Webb 

Financial Advisor 
Pinnacle Asset Management
Raymond James Financial Services 

Kidd Private Wealth Group