Jul 27, 2023 4 min read

This week, I’ll discuss the economy’s performance for the first six months of 2023. Inflation hit a high that we have not experienced since the 1980s. While many factors, including supply chain issues and excess government stimulus, increased inflation, it was the job of the Federal Reserve to get it under control. In response, it started a series of interest rate hikes. It has come down considerably but is still higher than its target of 2%.

As expected, the stock market was negatively impacted. Since 2008, the market had enjoyed tremendous growth. During 12 of those 15 years interest rates were near zero. This forced investors to buy stock to get any return on their investments. In 2022, the S&P 500 Index entered a bear market. This was caused by the Fed’s actions and not a recession. Cheap money and quantitative easing were replaced with sharp rate hikes and quantitative tightening.

Starting earlier this year, the stock market rallied, often based on hope that the Fed was done raising interest rates and wishing that it would start reducing rates. The Fed has made it clear that while it would be slowing further increases, it reserves the option to begin again if necessary and will likely not reduce rates soon.

The rally has not been broad-based, as it is concentrated in high-tech, communication services and consumer discretionary. There is a lot of discussion about artificial intelligence and how it may change the world. While this could make productivity increase, there is a lot of concern about the evil uses of the technology. The top 20 companies have been using a lot of their cash flow to buy back shares of their own stock. This will boost stock prices without necessarily adding value.

Eight of the 11 market sectors have lagged well behind the S&P 500’s 15.91% for the first half of the year. This includes some of last year’s top performers energy, utilities and consumer staples. Gasoline is down over a dollar a gallon from last year. This has been a major reason inflation is slowing.

A year ago, large-cap value stocks gave up 11.51% versus a nearly 20% decline in core shares and a 27.66% drop in growth for the first half of the year. During the first six months of 2023, growth has shined, especially for large caps. Year to date, large-cap growth is up 21.13%, core is up 16.88% and value is up 12.06%.

When interest rates go up, corporations and the government must pay more interest on their bonds because investors have options of where to invest their money. The value of existing bonds always goes down as interest rates rise. The further out the maturity date, the greater the amount of loss. This is an important rule to remember, considering most people look to bonds as their safe investment.

The yield curve has remained inverted for some time now. This means that interest rate for short-term government bonds is higher than longer term bonds. Investors normally require higher interest when committing their money for a longer term. This phenomenon is often seen as a leading indicator of a recession on the horizon.

The big question that remains is how the tight labor market will continue to affect inflation and a possible recession.

Make sure you are managing your risk appropriately and that your investments are positioned to function in a normal interest rate environment and not a zero rate.

Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.”

If there is an area that you would like to see discussed in the column, send your suggestions to gary@BoatmanWealthManagement.com.