Don’t look now, but the S&P 500 index just finished the first half of 2023 up +16% for its best first half since 2019, despite most Wall St. analysts shouting “DANGER: RECESSION AHEAD” since last Halloween. But that is yesterday’s news so as we turn the page to July and the start of the 3rd quarter, can history repeat itself?
After June’s gains of +6.5%, the bull rally from the October 2022 lows is now officially longer than the entire drawdown of 2022. Who could have predicted that? We never had the recession that so many saw coming. We never witnessed the Federal Reserve panic and the start to cut interest rates. So how is this even possible? The truth is, despite their similarities, the Economy and the Stock Market are not one in the same. The Economy looks in the rear-view mirror (what happened last quarter) and the Stock Market looks through the windshield (what’s ahead next quarter). So even though inflation (and the economy) looked disastrous in October, progress allowed the market to focus on the improving future ahead.
But make no mistake about it, this year has been a "game of inches" in the stock market. The market initially pushed higher and then would pause, awaiting confirming economic data. Then push higher and pause again. All the while, never giving up considerable gains as disinflation rolled on.
So, for the next 6 months, I am expecting more of the same, but with one minor difference. We are overdue for a normal market correction. Typically, we experience 1 to 2 pullbacks per year, and we haven’t had any yet. From a historical perspective, the third quarter of 2023 makes the most sense for this drawdown to occur due to seasonal trends like summer break. It’s not a guarantee but it’s what I am predicting. The good news is if a correction occurs over the next three months, I believe it would be minor, temporary and fully recover by the end of the year. Here are the three ideas that keep me bullish over the medium term:
- The AI Phenomenon - Slowly but surely Artificial Intelligence has taken the market by storm and now almost every corporation is trying to adapt and embed this technology into their business. So much so that some believe this could be the start of a Supercycle, like the internet, cloud and mobile internet.
- Too Much Cash on the Sidelines - There are still many pundits who believe that a “Hard Landing” is ahead for the economy. The more gains that come, the more pressure will arise to wave the white flag and admit they got it wrong, causing investors to quickly shift the $5.5 trillion dollars in cash, back towards equities.
- Market Breadth Improving - Last month, sectors like Energy, Materials and Industrials were weekly winners for the first time in a while. Hopefully, we will continue to see more improvement across sectors other than Technology as Q2 Earning Season is set to kickoff later this month.