- The Federal Reserve paused its aggressive rate hiking campaign in June.
- Stocks moved higher in the first half of 2023, but investors are still cautious on the economy.
- Treasury yields are higher than they started the year while the yield curve remains inverted.
After a streak of 10 straight interest rate hikes the Federal Reserve decided on a “hawkish pause” for June. While they did not raise rates this meeting, they indicated that they may continue to hike in the coming months. Inflation has fallen to 4% from its 9.1% peak last June, but higher rates may be necessary to achieve the Fed’s 2% inflation target. The strong labor market and unwavering consumer spending is propelling the economy ahead despite expectations of an economic slowdown. The long-anticipated recession continues to be a few quarters away.
Stocks marched higher in the first half of this year. The NASDAQ Composite has been the clear winner gaining 32%, followed by the S&P500 (+17%) and the Dow Jones Industrial Average (+5%). Technology (+43%) and Communication Services (+36%) stocks have propelled the NASDAQ higher, while heavier weights toward “old economy” sectors like Energy (-6%), Utilities (-6%) and Financials (-1%) weighed on the more balanced indices. Small caps have lagged larger stocks as tighter credit conditions from troubles in the banking sector and higher rates may lead to less access to capital for smaller borrowers. Both growth and value stocks performed well in June but for the first six months, growth has been the clear winner.
International equities moved higher this year with the MSCI EAFE Index gaining 12% for US investors. Emerging markets have lagged developed markets as escalating political tensions with China are weighing on investor confidence. Latin American stocks are up 19% as American companies increasing production in Mexico have sparked investor optimism.
The bond market has somewhat stabilized now that debt ceiling concerns and high inflation have abated. The Bloomberg Aggregate Bond Index gained 2% for the year with Treasury yields across all maturities higher than the start of the year. Yields across the curve are at multi-year highs but the Treasury yield curve remains inverted: shorter maturity yields are higher than longer dated bonds. This happens when the bond market expects the Fed to cut rates in the future to provide liquidity or stimulate the economy if we see a recession. We may not see that until 2024.
Sources: Morningstar Direct, Wall Street Journal, BEA.gov