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We have expressed concern since the outset of 2023 that the stock market would need time to sort itself out. Like many analysts, we were surprised as investors have blown past the obvious concerns: a debt ceiling brawl, a potential banking crisis, continued interest rate increases, and an imminent recession.  It seems this year has been a lesson in not getting overly pessimistic.

That said, our concerns remain. We must observe that most of the market gain has occurred in the so-called Magnificent Seven stocks of the giant technology companies. That growth seems driven by emotion and momentum rather than fundamentals. We question the sustainability of this peculiar boom in technology. We also agree with the term S&P 493 (minus the seven) which conveys that most stocks are indeed unsettled and uncertain.

We retain our opinion that the market will struggle in the months ahead. We expect the Federal Reserve to hike interest rates several times more to combat still stubborn inflation. We expect the much-anticipated recession will still occur albeit if delayed until 2024. These forces will weigh down the broader market even if the technology boom has more legs.

We advise our clients to have broadly diversified portfolios avoiding concentrated risk and look to a long-term strategy. As stated, we are cautious about the near-term outlook – but always optimistic about the future potential of the overall equity market.

The Economy:  

The story of the U.S. economy is buoyancy in the face of higher interest rates. To fight inflation, the Federal Reserve has boosted benchmark rates by 500 basis points – the steepest rate increase since the 1980s. Economic growth has slowed but the labor market and consumer spending are still strong. Inflation has subsided but is still way above the Fed’s target rate of 2% annually. We expect the Fed may increase rates twice more this year to ensure that inflation is subdued.

In our April commentary, we quoted the prediction from the Conference Board of a mild recession in the second half of 2023. We note that the forecast is now pushed forward into 2024. The logic is that the policy of Fed tightening is taking longer to have impact but eventually will take hold. Additionally, red alerts are flashing internationally.  The U.S. will feel the effect of Eurozone economies that are also slowing and at risk from aggressive central bank tightening.  China’s growth impulse is faltering after the post pandemic lockdown surge. Global commodity prices have declined more than 25% in the past year, a signal of imminent recession.

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