Market Viewpoints – Summer 2023

Keith Bonjour, Portfolio Manager
Keith Bonjour, CFP® Vice President, Portfolio Manager

Inflation has continued to slow over the last quarter with June’s CPI (Consumer Price Index) coming in lower than expected with CPI measuring 3% over the last year after hitting 9.1% a year ago. Core Inflation, which does not include food and energy, also slowed last month to an annualized rate of 4.8%. While the CPI inflation numbers are lower than we have seen since March of 2021, they are still not low enough for the Federal Reserve to declare victory over its battle with inflation. The Fed voted to pause rate hikes in June, but they are projected to resume another 0.25% rate hike at their next meeting towards the end of July. 

The Fed is intent on bringing inflation back down to the 2% level with an understanding that inflation has remained stubbornly high, especially in rent/housing costs and wage pressures. Average hourly earnings are still showing growth of 4.4% over the last year, which is too high for the Fed’s comfort. Producer Prices have begun to show some relief, which is good news for future inflation as the cost to produce goods goes down, so inflation should continue to moderate through the end of the year if this trend continues. Markets will continue to move based on inflation expectations and the Fed’s policy reaction to the data.

Both the stock and bond markets are showing positive returns this year with stocks rebounding strongly since their October 2022 lows. Employment, consumer spending, and company earnings have remained resilient allowing economic activity to prove stronger than expected. This has created a so-called “Goldilocks” scenario in the market where inflation is moving down, economic data remains positive, and the stock market is rebounding. This optimism is boosting the chances for a softer landing in the economy and reducing the chances of a recession. However, the market and economy are not out of the woods yet. Markets need inflation numbers to continue their downward trajectory along with wage pressures to ease and consumer spending to remain resilient. The higher the Fed raises rates, the more strain it can put on the economy and Fed rate hikes work with a lag. We will continue to monitor the data to determine its impact on economic growth and inflation.

Company earnings have remained resilient with most companies reporting above consensus to start the most recent quarter, as businesses continue to pass on the higher cost of goods and services to the consumer. Corporate profit margins remain strong after most likely peaking last year; however, profits are beginning to come down as demand slows and supply chains improve. This should prove to be a positive for inflation and wage pressures, but if consumers pull back meaningfully it could dent corporate earnings and have a negative effect on markets.

We continue to be mindful of the risks that the market faces going forward from an aggressive Federal Reserve policy stance, including sticky areas of inflation remaining elevated, company earnings coming under pressure, and continued geo-political risks. We recommend staying the course with your investment objectives with the understanding that markets go through cycles and both the stock and bond market will eventually find their footing. Please communicate with us if any short-term cash needs arise so we can look for opportunities to be proactive when raising cash for any necessary distributions, which helps to protect against possible short-term negative moves in the market.