Three themes for the second half of 2023

DEWITT, Mich. - June 27, 2023 - PRLog -- Key Takeaways:

As investors approach the mid-year point for 2023, there are a few notable trends to highlight: First, the markets overall continue to be remarkably resilient. The S&P 500 is up over 14% year-to-date, albeit still largely driven by a handful of sectors and large-cap technology stocks and supported by investor enthusiasm around the emerging artificial intelligence (AI) sector¹.

Second, the Federal Reserve (and central banks globally) do not yet seem done with their rate-hiking cycles. The Fed has indicated up to two more rate hikes are likely, although it may be headed towards a pause in the back half of the year. And third, the U.S. economy continues to defy calls for recession, with the Fed's own GDP-Now tracker calling for about a 2.0% growth rate in the second quarter².

So how may the economy, Fed, and markets fare as we head to the back half of 2023? We highlight three key trends below:

• The economy, and inflation, are likely to cool
• The Federal Reserve will pause its rate-hiking cycle, although rate cuts are not likely until 2024
• Markets may face some periods of volatility as the economy softens, but this will give investors an opportunity to position for a recovery period ahead

Theme 1. The economy and inflation are likely to cool

The U.S. economy may be heading towards below-trend growth

The U.S. economy has defied expectations and ongoing calls for a recession, even as the Fed has raised rates aggressively over the past 16 months and as the yield curve has been inverted since last July. This is in large part due to the resilience of the labor market, which still boasts an unemployment rate of 3.7% - near multi-decade lows – and healthy wage growth of 4.3%¹.

Theme 2. The Federal Reserve will likely pause its interest-rate hiking cycle in the second half of 2023

The Fed has continued to talk tough on battling inflation, as it likely should, given that headline inflation remains around 4.0%, and core inflation remains above 5.0%¹. The FOMC has indicated in its June projections that the peak fed funds rate may get to 5.6%, implying two more rate hikes from here.

Theme 3. Opportunities forming in both equities and bonds

The third theme for the back half of 2023 is the opportunities that are forming in both equity and bond markets for the 12-24 months ahead. While 2022 was a challenging year for investors, we are seeing early signs of a rebound, particularly in sectors that were hardest hit last year.

Sources: 1. FactSet 2. Federal Reserve Bank of St. Louis