“All of life is the management of risk, not its elimination.” – Walter Wriston
We apologize if you have heard this story from us before, but July was another good month for investors. Stock market indices continued their quiet rise, both domestically and overseas, as all the major indices we follow posted increases (see table below). Commodities – negative for the year at the start of July, posted strong gains this month to turn positive for the year. Bonds and the US Dollar were modestly negative.
All data as of 07/31/2023, Source: Wells Fargo Investment Institute. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
As we enter the month of August, the S&P500 continued to ride the wave of an impressive uptrend, reflecting strength in the stock market. In our July commentary we noted the relatively small number of individual stocks that drove the performance of the S&P500 in the first half of the year, along with the need for broader participation in the second half of the year for the rally to continue. Our belief was and is that broader participation would likely benefit lagging areas like small-cap stocks, mid-cap stocks, and value stocks.
After taking a big-picture view of the financial markets in July, this month we take a more micro look at what we see as the key factors contributing to the market’s upward trajectory, with a special focus on what we view as the robust state of the economy and what has been an unwavering strength in the consumer. As the stock market momentum has been persistent, it becomes essential to examine the underlying fundamentals and potential risks that may lie ahead.
The S&P500 Uptrend
The S&P500 has demonstrated remarkable resilience in 2023, maintaining an upward trajectory despite consistent concerns around company earnings power and a possible economic recession. As we will show a bit later in this analysis, we believe these concerns (at least up to this point) have been unwarranted.
Chart #1: www.stockcharts.com Data 01/01/23 – 07/31/23 as of 08/01/23. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results.
Resilient Economy & Confident Consumer
The US economy continued to show resilience in the second quarter of 2023. According to the Bureau of Economic Analysis (BEA), real gross domestic product (GDP), which measures the value of goods and services produced in the country, grew at an annualized rate of 2.4 percent in the second quarter of 2023, beating the Bloomberg consensus forecast of 1.8 percent. This was higher than the 2.0 percent growth recorded in the first quarter of 2023 and reversed the trend of slowing economic growth that had been observed since the fourth quarter of 2021.
The positive performance of the US economy in the second quarter of 2023 was driven by several factors, including increased consumer spending, business investment, government spending and net exports. Consumer spending, which accounts for about 70 percent of US GDP, rose by 3.1 percent in the second quarter, up from 2.7 percent in the first quarter, reflecting improved consumer confidence and income prospects. Business investment, which includes spending on equipment, software and structures, increased by 4.2 percent in the second quarter, up from 3.6 percent in the first quarter, indicating a recovery in business activity and optimism. Government spending, which includes federal, state and local expenditures, grew by 1.8 percent in the second quarter, up from 1.4 percent in the first quarter, boosted by fiscal stimulus measures and infrastructure spending. Net exports, which measure the difference between exports and imports, contributed positively to GDP growth in the second quarter, as exports rose by 6.7 percent and imports fell by 2.5 percent.
Consumer confidence in the U.S. economy improved again in July 2023, reaching its highest level since July 2021, according to The Conference Board, a business think tank. The Consumer Confidence Index (CCI), which measures consumers’ optimism or pessimism about their financial situation, rose to 117.0 in July, up from 110.1 in June. Consumers also expressed greater confidence in the short-term outlook for the economy and income prospects, as the Expectations Index increased to 88.5 in July, up from 79.7 in June.
Positive Market Breadth
In our opinion, market breadth indicators, such as the advance-decline ratio and the number of stocks hitting new highs versus new lows, have been pointing to a more positive sentiment in the stock market. These indicators suggest that a broad range of companies are participating in the uptrend, rather than just a select few. This broader participation can be considered a healthy sign for the overall market.
Two specific trends we have noticed:
- Sector Rotation: Investors have been rotating into different sectors based on changing economic conditions and emerging trends. We believe this rotation indicates a dynamic and well-rounded market.
- Small-Cap and Mid-Cap Performance: As we mentioned at the top, small-cap and mid-cap stocks started a move higher in June, indicating to us both a broadening of the market and an increased risk appetite among investors. In our experience, such outperformance has been typical in a strong market.
Chart #2: www.stockcharts.com Data 11/10/22 – 07/31/23 as of 08/01/23. The top panel is the S&P600 Small Cap Index. Bottom panel is S&P400 Mid-Cap Index. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results.
Positive Market Breadth
While we do remain positive on the stock market through the end of 2023, we are cautious on the short-term for a number of reasons.
- Seasonality: Historically, August has been associated with lower trading volumes and increased market volatility as many market participants go on summer vacations, leading to potential fluctuations in stock prices. September is known for being a challenging month for the stock market, often exhibiting higher levels of market corrections and pullbacks.
- Overly Positive Market Breadth: Broadening market participation is a good indication for the stock market. At some point the uptrend reaches its end point and the trend reverses. In our experience, that reversal often coincides with a short-term market top. (Chart #3)
Chart #3: www.stockcharts.com Data 071/19/21 – 07/31/23 as of 08/01/23. An index is not managed and not available for direct investment. Past performance is not a guarantee of future results.
(The top chart is the S&P500 Bullish Percentage index which represents the percentage of companies that are in a bullish point-and-figure chart pattern. The bottom chart is the S&P500. The arrows represent turning points off peak levels of the Bullish Percentage and peaks in the S&P500.)
We believe the S&P500’s uptrend and positive market breadth signal a market that is currently well-supported by what appears to be a strengthening economy and an optimistic consumer. The overall bullish sentiment is a testament to the resilience of the U.S. stock market and its ability to weather various challenges. Big picture we would not argue against the stock market.
We do, however, have concerns about the next few months. As we showed earlier, August and September have historically produced weak stock market performance. Even with market breadth broadening out being a positive, we believe it has gotten just a bit too strong and could be turning lower.
The current overall trend remains higher, in our opinion, but market trends are not linear. In every uptrend we have experienced there are periods of sideways action as well as short-term corrections. So while we remain optimistic on the stock market we do think that the current uptrend consolidates over the near-term.
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- July 2023 Stock Market Commentary (Magellanlv.com)
- Gross Domestic Product, Second Quarter 2023 (Advance Estimate) | U.S. Bureau of Economic Analysis (BEA)
- BEA 2nd Quarter GDP News Release July 27, 2023 (bea.gov)
- August is among the worst months of year for the stock market. Here’s how to play it. – MarketWatch
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
Asset allocation and diversification are investment methods used to help manage risk. They do not guarantee investment returns or eliminate risk of loss including in a declining market.All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, reviewed, or produced by MSCI.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.
The CRB (Commodity Research Bureau) Index measures the overall direction of commodity sectors. The CRB was designed to isolate and reveal the directional movement of prices in overall commodities trades.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents.
U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to majority of its most significant trading partners. The index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.