By: Carter E. Anthony, CFA
During the first six months of 2023, coming off a disastrous year in 2022, all three major indices of the stock market had positive returns.
The most conservative index, the Dow Jones Industrial Average, rose 3.8%. The more broadly diversified S&P 500 Index increased 15.4% and the tech-heavy NASDAQ grew by almost 32%.
While it is only six months of work, these increases have not offset the losses in the indices in 2022. Why the strong growth numbers in the indices?
As I wrote earlier this year, seven large tech stocks were driving the S&P 500’s returns. Without the returns from those tech stocks, the S&P 500 is negative for the year.
This is highly evident in the return of the Dow which has an appropriate representation in tech socks thus a lower return and the NASDAQ which has an even more outlier return than the S&P.
The tech stocks are being driven by their participation in artificial Intelligence (AI) which if it is not already, is the next big bang in technology.
There are investors who want to be on the leading edge of the next big thing and there are those who want to follow and get in before it is too late.
Oftentimes, those getting in on the leading-edge wind up with worthless investments.
Warren Buffett mentioned in one of his letters that he doesn’t get in on the leading edge but waits until the chaff has been weeded out and the smoke has cleared which has always been my position as well.
From a top-down approach to investing, the returns for the first six months in the S&P 500 and the NASDAQ don’t make any sense.
At the top is the socio-economic environment. Our Federal Government Administration and Congress daily push the United States toward bankruptcy.
As long as we can borrow, maybe the country doesn’t bankrupt, but soon interest on the outstanding debt will be our biggest expense.
Will we have to issue debt to pay interest on the debt? Our country has never faced such a mounting problem but Democrats specifically have always favored “tax and spend” and they haven’t changed. Republicans do little to rein them in.
Recently, Fed Chairman Powell said the Fed needs to raise short-term interest rates a couple more times before pausing to see the effect on inflation.
The old adage, “Don’t fight the Fed” works both ways. Rising interest rates make bond yields more attractive and stop the growth of the stock market in its tracks.
While the first six months of the year had good equity returns, the indices are only back to where they were two years ago when the Fed started raising rates. With the Fed cloud hanging over, there is no reason to expect a good second six months.
Corporate-wise, earnings are weakening as inflation has increased expenses. Corporate earnings drive stock prices.
To prop up earnings, corporations are laying off workers across the board. As workers are laid off and wages stagnate, consumer spending will slow.
Consumers make up almost 70% of the economy. As the consumer goes, so goes the economy and the stock market.
Business Insider surveyed seven top Wall Street firms for their forecast for the next six months.
Five see little or no gain, possibly the backing up of stock indices, while two predicted continued although slow growth in the second half.
A few of the five naysayers were throwing out percentage losses in the indices of 9%, 10%, even 20%.
The British are coming, the British are coming! No Paul, it is the Recession that is coming!