2023 Midyear Outlook: Do Equity Markets Warrant Caution Ahead?

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1969 is often remembered as one of the biggest years in pop culture history. Broadway Joe Namath guaranteed his upstart AFL Jets would win the Super Bowl—and then went out and did just that. The Beatles played together in public for the last time on a London rooftop. Neil Armstrong took one small step for man and one giant leap for mankind. About 400,000 people descended on a farm in New York for the Woodstock Music Festival. And finally, the Miracle Mets won the World Series.

At this point, you’re likely wondering what any of this has to do with today’s equity markets. The answer is that, before last year, 1969 was also the last time stock and bond markets declined in the same year. In fact, 2022 was just the third time in history that this happened. Even if you look at quarterly data, stock and bond markets decline together only 10 percent of the time. So, while not unprecedented, last year's performance was certainly unusual. But this leads to a bigger question: after a rally in the first half, what can investors expect from equities in the second half of the year?

Markets Scale Wall of Worries

Last year, a lot of bad news was discounted in equity markets. The S&P had declined as much as 27 percent by early October 2022 and notched an 18.11 percent decline for the year. That same uncertainty that led to the declines still existed as we entered the new year.

Unlike 2022, in the first half of 2023, equity markets managed to scale a wall of worries. These included elevated inflationary data and Fed rate increases, the debt ceiling debate in D.C., and the second-, third-, and fourth-largest bank failures ever seen in the U.S. Despite this fraught backdrop, markets were up.

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