as of June 30, 2023
Global markets moved higher during the quarter as slowing inflation, the pause in the Federal Reserve’s hiking cycle, an agreement on the debt ceiling and enthusiasm over artificial intelligence supported investor optimism. Volatility remained relatively subdued throughout the quarter, despite issues in the banking sector and difficult negotiations over the debt ceiling. Economic growth, particularly in the US, has been more resilient than most economists expected.
In the US, GDP grew at an annual rate of 2.0% during the first quarter, with economic data and corporate earnings surprising to the upside during the second quarter. Combined with slowing inflation and excitement around artificial intelligence, this led to a strong run for equities. However, a large portion of those gains occurred in a small number of mega-cap tech stocks, increasing index concentration and presenting risks if sentiment toward those companies were to reverse. Consumer strength has continued to support the economy, as a strong jobs market and residual COVID-era savings and stimulus continue to drive spending. However, the accumulating impacts of higher prices and interest rates are depleting excess savings. While the jobs market remains strong, the pace of jobs gains is slowing.
Inflationary pressures continue to weaken, with headline CPI for June falling to 3.0%. The Core CPI rate, which is closely watched by policymakers, also declined meaningfully over the quarter, but it remains elevated at 4.8%. The continued downtrend in inflation should take some pressure off the Federal Reserve, although the market continues to expect a 25 bp rate hike in July.
Global equities posted gains during Q2, with the MSCI ACWI index rising 6.2%. The index has gained 13.9% year-to-date. The S&P 500 gained 8.7% during the quarter, and it is now up 16.9% in 2023. International developed stocks gained 3.0% in Q2, bringing their 2023 gains to 11.7%. A stronger dollar detracted 130 bps from US$ returns during the quarter. Emerging market equities rose 0.9% in Q2, and have gained 4.9% year-to-date. Latin America has been the best performing emerging market equity region this year.
Within fixed income (bonds), the Bloomberg Aggregate Index declined 0.8% during the quarter. Treasuries declined 1.4%, lagging corporate bonds which fell 0.3%. The yield curve shifted higher during the quarter, with longer-term yields near their levels at the start of 2023.
Global developed REITs gained 0.5% during Q2, lagging broader equity markets. Infrastructure stocks declined 0.3% during the quarter. Commodities generally declined during the quarter, while natural resource stocks
A mild recession in the US later this year or in 2024 remains possible, as the Federal Reserve’s tightening cycle impacts the economy with a lag. However, if inflation continues to trend lower, we do not expect a mild recession to be especially bearish for equities because the Fed would have some flexibility to ease, potentially offsetting the impact of weaker earnings. However, if inflation were to remain sticky or move higher, it could require the Fed to tighten more aggressively than the market is pricing, which could result in a deeper recession and further weakness for stocks and bonds.
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