The Recent Past Won’t Last

Yesterday is a mystery-where it is today; While we shrewdly speculate flutter both away

Emil Dickinson – “Yesterday is History”

“Market Monster 2023 Rally Defied All Expectations” read the headline in the July 1st Wall Street Journal. “Stocks burst out of a bear market with the Nasdaq Composite up 32% posting its best first half of the year since the 1980’s” began the story. Interestingly, 2023’s first half return for the S&P 500 of 15.9% places it as tenth best in the years since 1951 serving as a counterpoint of 2022’s -15.6% as the third worst. (note that these are “price only” returns and do not include returns attributable to dividends). While technology stocks continue to grab the headlines Carnival Cruise Lines was the month’s best performing stock returning 67.7% for the month and 133.6% for the year with Delta Airlines the fifth best up 30.9% and 44.7% respectively. Providing further evidence of the notable broadening out of the market in June was the outperformance of small cap and midcap stocks returning 8% and 9% respectively versus the S&P 500’s 6 ½%. For those keeping score the S&P 500 is now just 6% from reaching its all-time high of January 3rd of last year.

With the rising temperatures of summer seemingly having sent the bear population back into hibernation perhaps it might be helpful to recognize the existence of some creeping shadows whose outlines are becoming visible. While not necessarily having a significant impact on our economy until next year we should not forget that equity markets tend to begin to discount such events approximately six months prior to their actual appearance. In the interests of brevity, we’ll focus upon just three; mortgage and student loan payments, the downward migration of the number of job openings in relation to job applicants and the coming depletion of the surplus savings of the US population.

The market for single family homes in the US is composed primarily of the resale of existing homes as that volume exceeds the purchase of new homes by a factor of seven to one. The average mortgage payment in this country is $1672 and most of those are fixed at rates of between 3% and 5%. At current interest rates the average payment is now $2300. Homeowners have been loath to sell their homes as evidenced by a near 20% decline in the volume of existing home sales year over year which has acted to support housing prices. The decision to move though, in most instances, is one that can be deferred but not postponed. Gradually, owners will sell, buyers will buy, housing prices will adjust downwards and increasing numbers of households will be faced with notably higher monthly mortgage payments. Add to this the US Supreme Court’s ruling on June 27th that 42.3 million Americans who have enjoyed three years of forbearance on making payments on their $1.6 trillion in student loans will need to start making payments in October on those loans averaging $275 month.

Investors stepped into 2023 being continuously reminded, by almost everyone with an opinion on the subject, of the inevitability of the coming recession. This year is now half over, and an increasing share of those prognosticators have come to believe that our national economy may slow but will continue to, at worst, muddle along. A significant likely contributing cause to our having avoided more challenging economic circumstances is the $2.6 trillion we received, primarily from the federal government, for pandemic relief. We’ve spent that down to $1.2 trillion as of April and, at the current rate of their depletion, household savings will be back to their pre-pandemic levels in just about a year.

Finally, many have been struck by the plethora of “help wanted” signs just about everywhere one is able to spend their money, as prominent as American flags at a 4th of July parade. This is a significant contrast to the first eighteen years of the 21st century when those seeking work outnumbered the jobs they were seeking. That started to change even prior to the pandemic but by the onset of 2021 job openings outnumbered those seeking them by over two to one. Currently we’re at 1.6 with that rate heading steadily lower. With that rate still elevated, workers losing jobs can easily find another so the slowdown in the rate of new job creation has not yet translated into higher rates of unemployment. But should the economy continue to experience a decelerating rate of growth, those losing jobs will end up becoming unemployed and the rate of growth in wages will lessen.

Ok. The end of June is the end of the month, end of the quarter and end of the first half of the year so lots of numbers. So far this year it’s been up to the equity part of the portfolio to do all of the heavy lifting of creating positive portfolio returns. Year to date the 60% of the portfolio that is invested in equities has returned 13 1/2% but with portfolio returns over that time returning +7% the 40% fixed income share has contributed -3% as stubbornly persistent and elevated interest rates remain that way. June contributed 6% or just under half of equities’ year to date returns. The great majority of the second quarter’s earnings were earned in June and roughly equal shares of those 7% portfolio returns were earned in both the 1st and 2nd quarters.

Mark H. Tekamp/July 8, 2023