Weekly Market Update: August 7, 2023
The economy seems to be holding up reasonably well, despite a challenging backdrop. According to the advance estimate, gross domestic product (GDP) rose at an annualized rate of 2.4% during the second quarter. This figure exceeded the consensus view, and was better than the 2.0% growth recorded in the first quarter. The consumer continues to spend and the labor market remains healthy, with the unemployment rate comfortably below the 4% mark. Moreover, inflationary pressures appear to be easing. Specifically, the PCE (personal consumption expenditures) Price Index showed a 3% increase in June, year over year, representing notable progress in this area.
The Federal Reserve has done a good job at managing a difficult situation. Over the past year, or so, the central bank has hiked interest rates aggressively, pushing the fed funds rate to the 5.25% - 5.50% level. Fortunately, these restrictive actions have managed to tame inflation without driving the economy into a recession. Although work may still be needed to reduce inflation to the bank’s 2% goal, much of the heavy lifting is probably over.
Meanwhile, Corporate America appears to be weathering the storm. Second-quarter earnings season is well underway, with roughly 50% of the companies in the S&P 500 Index having reported their results. Although profits remain under pressure, there have been numerous positive surprises, and the outlook for the second half of 2023 appears supportive. Still, it should be noted that the Value Line median price-to-earnings (P/E) multiple stands at 17.4, with many stocks trading at higher multiples. Unfortunately, this leaves limited room for disappointing news.
The stock market continues to press ahead. The S&P 500 Index has rebounded from the low point reached in October of 2022, and is up about 20% year to date. In addition, we are starting to see broader equity sector participation. The technology stocks clearly led the market higher during the initial stages of the rally, propelled by advances in artificial intelligence (AI). This dynamic is now shifting, and investors are gravitating to previously out-of-favor issues.
Conclusion: Although the environment seems to be improving, a balanced approach is likely warranted. Investors should hold shares of quality businesses.