Our Quarterly Investment Letter

It's been one incredible first half for the stock market. Despite a slight slowdown in inflation last month, investors have still been able to bask in the glow of the strong market performance over the past six months. The S&P 500 closed at a new 52-week high on Friday, up 15.9% for the first half of the year. Similarly, the Nasdaq Composite has seen a remarkable 31.7% gain, its best six-month start in 40 years, driven by strong investments in tech stocks.

The Dow Jones Industrial Average has lagged somewhat behind, up only 3.8%. With market sentiment increasingly calling this a new Bull market, the money on the sidelines in money market funds may soon start to enter the market, further driving up stocks.

Apple became the world’s first corporation to close with a market value above $3 trillion, a milestone that reflects the lasting impact and resilience of the iPhone. Bitcoin surged 80%, despite the US Securities and Exchange Commission suing the world’s biggest cryptocurrency exchanges. Bonds enjoyed some reprieve, too, with indexes tracking Treasurys and junk bonds posting modest gains following their historic selloff last year. Fresh spending data added momentum on Friday, showing milder core-price increases in May compared to a month earlier, while consumer outlays continued to rise. All these factors buoyed investor confidence in risky assets.

Investors have been riding a wave of optimism despite a banking crisis, the threat of a U.S. default, and additional Federal Reserve interest rate increases. But why? It appears that the worst-case scenarios many feared have failed to materialize.

Quick action from regulators and bankers in March prevented the collapse of Silicon Valley Bank from becoming a systemic crisis. In late May, lawmakers agreed on a government spending plan, acting just in time to avert the first-ever U.S. default on debt. Plus, the feared recession that economists were predicting has, so far, not arrived.

The Fed has continued to raise interest rates in an effort to quell inflation, and this has had some effect: existing home sales have dropped by a third since the start of 2022. But the higher rates haven't stopped the economy from expanding - GDP increased at a 2% annualized pace in the first quarter, while jobs continue to be added at a rate that exceeds the pre-pandemic average. All of this has given investors hope that markets can keep climbing, and keep providing positive returns.

This year, stocks have been on a tear despite concerns about an economic downturn. While other parts of the market have gained ground in recent weeks, many of the biggest winners have been the mega-cap technology companies at the forefront of artificial intelligence.

While the breadth of the market has been narrow thus far, we do believe the rest of the market will catch up. We are not alone in our views, not only does history point to a catch-up trade in small cap stocks, but Goldman Sachs also recently released research echoing our views. They believe small caps have a 14% upside over the next 12 months.

Still, the divisions in the market have been clear. Most investors and analysts agree that the economy is slowing and that historically recessions have been a negative for markets. There is no consensus, however, on when a recession might occur and if it will have an impact on stock prices.

Ultimately, those who stayed out of markets in fear of a selloff this year missed out on the stock market’s robust gains. While there’s still time to make up lost ground, investors should remain aware of the potential risks and rewards of investing in the current climate. We, however, do remain relatively bullish for the remainder of the year and believe the recession will be pushed back and small cap stocks will catch up to their larger brethren.

Earnings & Economic Calendar

On Monday, the stock market will close early in advance of Independence Day and remain closed on Tuesday. When investors return after the day off, they will be greeted with a flurry of economic news.

The focal point will be the U.S. labor market: On Thursday, the Bureau of Labor Statistics (BLS) is forecast to report 9.9 million job openings as of the last business day of May, and on Jobs Friday, the BLS is expected to report a 212,500-job gain in June. In addition, the unemployment rate is predicted to remain at 3.7%, while average hourly earnings should see a 0.3% monthly rise.

Other key data releases next week include the minutes from the Federal Open Market Committee's mid-June monetary-policy meeting on Wednesday, and the Institute for Supply Management's manufacturing and services purchasing managers' indexes for June on Monday and Thursday, respectively.

Disclaimer: The author of this blog is a financial advisor but may not be the right advisor for you. In fact, the author may not even be the right advisor for themselves. Please consult a qualified professional before making any financial decisions based on the content of this blog. And remember, just because the author has a fancy title and a briefcase full of spreadsheets, doesn't mean they know what they're doing.