Mid-Year Market Outlook

Executive Summary

Investors have had a lot to contend with thus far in 2023. Moderating economic growth, persistent inflation, volatile interest rates, falling profits, stress in the banking sector, war in Ukraine, and the debt ceiling debate all combined to weigh on sentiment.

Nonetheless, large cap equities and mega-cap tech names have jumped higher, providing a degree of relief for investors. We remain concerned, though, that these moves are beyond optimism over growth prospects for AI, for example, and instead reflect misguided hopes for a change in the direction of monetary policy. Indeed, under the surface, the equity market looks less healthy than the major indexes suggest.

After gaining clarity on the debt ceiling, we look for the Federal Reserve to remain steadfast in its policy pursuits, with elevated interest rates and tighter credit standards weighing on economic activity for the remainder of the year. Falling corporate profits historically have led to reductions in employment and capital expenditures, and we see no reason why this experience should prove any different. Therefore, it is conceivable that we will need to retest the October equity market lows before investors reprice a recovery in GDP and corporate profits next year. After a bout of further volatility this summer, we look for the S&P 500® Index to be fairly valued near current levels (4,150-4,200) by year end.

In the meantime, we will continue to emphasize our diversified strategies for long-term portfolios favoring quality in bonds and value for equities.


Fiscal Policy Risks Temporarily Supplant Monetary Concerns

After months of negotiations and accusations, it appears we are finally close to resolution to raise the federal debt ceiling from $31.4 trillion. To be sure, the process has been concerning to the financial markets, as investors attempted to divine the ramifications from a failed negotiation, potentially leading to missed payments for critical programs like Social Security and Medicare, as well as the possibility for an unconscionable federal debt default. The risks to these potential outcomes were severe, ranging from recession to a multi-year global financial crisis. See chart: U.S. Federal Outstanding Debt & Annual Fiscal Spending.

fiscal spending