2023's Market Trends - A Journey Through Bull Investment Territories

Riding the Bull: 2023's Unexpected Market Rally

The first half of 2023 took investors by surprise, with the U.S. stock market climbing its way past most predictions, despite a handful of obstacles. As we move into the latter half of the year, both the hindrances and the catalysts of the previous rise persist. The possibility of a robust first half juxtaposed against a potential recession in the latter part may be a complex play to navigate. Yet, opportunities in value stocks and markets beyond Japan in Asia hold promise.

Spotlight on Market Forces

• Following a robust first half, historical data suggests that U.S. stocks are likely to continue ascending.
• Amid a robust economy, tech stocks spearheaded the gains in the first half.
• Nevertheless, prospective Federal Reserve interest rate increases and recession risks continue to cloud the horizon.

Notwithstanding these conflicting factors, the S&P 500 Index managed to ascend by 17% in the first half, indicating the dawn of a new bull market.

Historically, a strong first-half performance is usually echoed in the second half. Post-1950 data shows that when the S&P 500 reported positive returns in the first half, the index typically followed up with a 6% increase in the second half. If these initial returns surpassed 10%, average gains in the latter half escalated to 7.7%, with positive outcomes materializing 82% of the time.

Economic Resilience Trumps Predictions

Moreover, encouraging economic signs such as GDP growth and a resilient job market indicate that the U.S. economy is too robust for an imminent collapse in earnings. Rising prices in sectors like finance, industrials, and materials, typically presaging an economic downturn, indicate otherwise. Coupled with a continuous improvement in inflation, a robust first quarter seems plausible.

However, instead of a sharp drop, earnings might show a gradual decrease throughout 2023, testing the patience of market bears. An inverted yield curve, created by falling long-term bond rates, hints at a potential economic slowdown. Could this mean a challenging second half after a surprisingly upbeat first half? It remains a possibility, with the potential risks likely surfacing in the latter half of the year.

A Sturdy Economy Amid Challenges

In 2023, the U.S. economy demonstrated significant resilience. The employment sector remains steady, and corporate profits have surpassed expectations. Collective earnings for S&P 500 firms saw a slight 0.1% increase in the first quarter, far better than the predicted 5-6% drop.

The steady earnings mirror an overall growth in the U.S. economy at an annualized rate of 2% in the first quarter, nearly doubling initial predictions. Tech stocks, bolstered by investor enthusiasm over artificial intelligence, led to a significant surge, contributing to most of the first-half gains. The technology-heavy Nasdaq Composite Index recorded a 32% rise, its highest since 1983 and nearly twice the broader market growth.

Challenges on the Horizon

On the flip side, lingering inflation remains a concern. Interest rates, which have already reached a 20-year high, could rise further, stirring fears of a recession and triggering worries about the impact on the banking and credit sectors.

The strong performance of tech stocks, although encouraging, is also cause for concern. Five tech giants—Apple, Microsoft, Nvidia, Amazon, and Meta Platforms—drove around two-thirds of the S&P 500's first-half return. Meanwhile, 44% of the index's stocks experienced a decline. In the year's first five months, 286 U.S. firms filed for bankruptcy, the highest number since 2010.

Looking Ahead: Second Half Forecasts

Despite these challenges, the economy's resilience in the face of increasing interest rates suggests that the Federal Reserve, which paused interest rate hikes in June for the first time in 15 months, may soon resume the hikes.

Forecasts for the second half point to an unpredictable landscape, with some predicting a mild recession as a result of the Fed's projected rate hikes. This could mean a challenging backdrop for stocks. However, some experts believe that the 2023 earnings-per-share (EPS) recession is a known quantity, and the market may shift its focus to an EPS rebound in the latter half of the year.

Emerging Opportunities: Asia Ex-Japan and China

Emerging markets are beginning to outperform, particularly in Asia ex-Japan. After the U.S. dollar peaked in September 2022, these markets began to outperform the U.S., and China holds a particularly promising position. Global growth is accelerating, and U.S. bond market yields are now less attractive relative to the rest of the world. Despite this, foreign retail investors have largely held back from China—for now.