July Economic Update

Market Summary

Stocks rallied across the board in June with improving market breadth in spite of growing economic concerns and comments from the Federal Reserve that they will continue to raise interest rates to tame inflation and cool down the economy. The S&P 500 gained 6.47% with the Nasdaq 100 following closely behind at 6.49% while the Dow Jones Industrial Average rose 4.56%. (1)

Economic Data

Data reported last month was once again mixed with Gross Domestic Product (GDP) and the services sector surprising to the upside, while manufacturing and inflation data gave pause to investors. GDP quarter-over-quarter came in at 2.0%, above consensus estimates of 1.4% but lower from the previous report of 2.6%. Nonetheless, the underlying economy has remained resilient in the face of interest rates that are more than twice as high as economic growth. (2)

Monthly inflation data remained elevated for Core CPI which excludes food and energy prices and is closely monitored by the Federal Reserve for interest rate policy. The year-over-year rate of change came in at 5.3% which remains much higher than the Fed’s goal of 2.0%. (3)

The Federal Reserve

On June 14th, the Federal Reserve took no action with interest rates, keeping the target range between 5.00% to 5.25%. This marked the first interest rate pause since early 2022 and was a welcomed reprieve from monetary tightening. The Fed had previously signaled further rate increases may not be needed in the wake of the banking stressors experienced earlier this year but are now forecasted more interest rate increases ahead as inflation and job market metrics remain elevated well above their stated objectives.

In their most recent forecast released last month, the Fed intends to raise rates another 0.50% before year-end to a median level of 5.6%. The meeting minutes from June stated maintaining a tight monetary stance was necessary to prevent inflation from becoming entrenched in the longer-term, with the likelihood of a mild recession occurring sometime within the second half of this year. (4)

Looking Forward…

As we enter into the second half of this year, the markets and analysts will continue to increasingly focus on any signs of the “lag effect” from the interest rate increases we have experienced over the past 18 months. While the stock market indices struggled last year in 2022 with rate hike concerns, they have largely ignored those concerns during the first half of 2023. We remain in a tight monetary environment with interest rates far exceeding real economic growth with corporate earnings declining, yet the impact of these conditions has not been reflected in stock valuations during the course of this year.

A key component to the latter part of 2023 will be the job market which has remained strong. If that strength continues, the Federal Reserve will likely continue to increase interest rates above their current target of 5.6% in an attempt to further slow down the economy and grapple with inflation. On the other hand, if the labor market softens only slightly during this tightening period and core inflation finally begins to relent, then there is the possibility that we avert economic contraction which the Fed is currently seeking.

In the shorter-term into July and August, investors and analysts will shift their focus to Q2 earnings reports. After several consecutive quarters of contracting earnings and profit margins, large and/or numerous upside surprises could help to offset the macroeconomic concerns to further drive this current market rally.

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Monthly Financial Tip:

Most consumer expenses boil down to choices and options rather than necessities. Keeping that in mind could help you save money month-to-month.

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Citations:

1. WSJ.com, May 31, 2023

Disclaimers:

This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.