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Q2 Stock Market Recap

Q2 Stock Market Recap

During Q2 of this year, global markets performed positively, experiencing a rise of over 6%, which brought the total gains for the first half of 2023 to roughly 14%. Despite the economic data surpassing expectations and a remarkable recovery from the low of October 2022, the current bull market is accompanied by a familiar “wall of worry.” This saying refers to the multitude of investor fears that tend to dampen market sentiment as stock prices climb higher. As we approach the back half of 2023, these fears likely subside, providing the new bull market significant room to grow and potential for positive surprises.

June marked the end of a nearly flawless illustration of the nine-month “Midterm Miracle” phenomenon we wrote about in October 2022. This period, observed near US midterm elections, has historically shown remarkable positivity, with gains occurring over 90% of the time and averaging just above 19%. Following this trend, the S&P 500 surged slightly over 25% from September 30th until June. While the “Midterm Miracle” phase might be drawing to a close, the positive momentum likely continues. Historical data dating back to 1925 indicates that the second half of a president’s third year in office has been positive about 75% of the time, albeit with lower returns than the first half. The gridlock that supports the “Midterm Miracle” generally keeps legislative risks low. Furthermore, US political factors continue to play a supportive role in equities performance during the fourth year, with greater than an 80% chance of positive returns and an average return of slightly more than 11%. The presence of gridlock and the politicians’ inclination to avoid divisive legislation during their campaigns contribute to this positive environment.

Despite the favorable economic and political conditions driving the bull market, many argue the current market environment is inherently unstable. They claim the rally is driven primarily by AI-fueled enthusiasm for giant Tech companies, while other sectors seem to underperform. However, this perspective may be flawed. The rapid decline in market breadth, referring to the number of stocks participating in the rally, is considered bullish and typical of a new market cycle.

The dominance of large, growth-oriented companies can be explained by what experts call the “Bounce Effect.” During the market recovery, the worst-performing equity categories tend to bounce back more strongly. This phenomenon has been evident since the start of the current bull market last October. Despite their strong fundamentals, large growth equities experienced a significant decline during the 2022 bear market, making them rebound more robustly now. Additionally, many economists are still predicting a potential recession or, at best, sluggish growth. This recession fear fuels concerns over a low-growth global economy, which benefits companies capable of generating earnings even in such an environment. These companies are considered true growth equities, and their outperformance results from the combination of tight supply and high demand. Hence, the notion of a narrow market breadth being a cause for concern might be misguided, as many growth companies have responded logically to prevailing economic conditions.

Another skepticism raised by pundits revolves around the impact of interest rate hikes on equities. Some argue that the bull market’s certainty hinges on the Federal Reserve halting or reversing its rate hike measures. However, contrary to these beliefs, the S&P 500 has shown slight gains since the Fed initiated rate hikes in March 2022 and has risen by more than 23% since the pace of tightening increased last June. Many still expect a recession to manifest at some point this year, including a majority of recently surveyed CFOs. Against that pessimistic backdrop, the stock market is proving more resilient than almost any forecaster thought likely at this time last year—bull market fuel.

When fears overwhelm the narrative, it doesn’t take much for meager positives to boost moods—and stocks. This increase indicates equities are not necessarily bearish in response to rate hikes. Such skepticism contributes to market dynamics, fueling continued market growth. While it’s true that risks exist in the world, the commonly cited negatives seem insignificant or well-known, unlikely to deliver a substantial negative shock. Moreover, positive factors such as global growth, an earnings recovery, and political gridlock globally provide ample bullish fundamentals for equities to thrive.

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