Mid-Year Market Lookahead: 8 Things to Know

By Tammy Trenta, MBA, CFP, CTC, CEXP, Founder and CEO - Family Financial

Are we there yet? Most of us have been on the receiving end of the queen bee of frustrating travel inquiries. But when it comes to the stock market - which, of late, has also been quite an adventure - many investors are feeling antsy about the trip and asking that very same question. The first half of 2023 brought plenty of surprises that influenced the markets for better or worse and point to trends we’ll want to watch out for on the road ahead.

Our goal is to successfully navigate the rest of 2023, which means allowing flexibility for detours and steering clear of potholes and falling objects along the way. Proactive investors are pulling over and regrouping (after all, you need to know where you’ve been to know where you’re going). Most importantly, we’re keeping an eye on what’s in front of us. Here are the 8 things you need to know:

1. We averted a debt ceiling crisis. The country breathed a sigh of relief as Congress agreed to raise the debt ceiling in return for some budget reductions and future spending caps, keeping the U.S. credit rating in good standing. We’re heading into the summer with signs of strength in the capital markets thanks to this (and other) good news.

2. First-quarter earnings reports were better than expected. A surprising number of companies exceeded earnings per share (EPS) and revenue. The first quarter of the year saw an impressive 78% of companies exceeding expectations and providing more optimistic estimates ahead, indicating a healthy stock market.

3. Jobs are still okay-ish. Despite a sharp increase in layoffs in the tech and banking sectors, unemployment numbers remained (relatively) unbothered. In fact, the recent jobs report surpassed estimates of new jobs created, indicative of a surprisingly robust labor market. Although unemployment claims are on the rise, what’s not reflected in the unemployment numbers are workers who have shifted to the gig economy.

4. Banks collapsed. The regional banking crisis and recent collapses have prompted the Federal Deposit Insurance Corporation (FDIC) to step in and enforce regulations on regional banks. So banks are tightening lending practices, leading to higher rates and stricter underwriting standards. Individuals with adjustable-rate loans will undoubtedly face difficulties refinancing when their loans reset, which could negatively impact the housing market. Speaking of…

5. A cloudy real estate forecast spells uncertainty. In real estate, home sales are weakening while housing permits increase. The tightening credit conditions mentioned above may further complicate financing for new real estate projects. Commercial real estate will likely face challenges, particularly as billions of short-term commercial loan rates reset over the next few years. That, coupled with high vacancies due to the remote work culture, could have ripple effects in the real estate sector.

6. Inflation hasn’t popped. 18 months ago, core inflation stood at a troublesome 9%. Today, it’s dropped to 4% - better, but still not where the Fed wants it to be. If the market doesn’t correct itself quickly enough, we can expect more rate increases this year.

7. Interest rate hikes could impede growth. Higher interest rates aren’t likely to go away anytime soon. They could eventually squeeze consumer spending and bank profitability. This would be particularly catastrophic to regional banks (see #4), which carry 90% of commercial loans. While experts predict either a recession or a soft landing - the timing remains uncertain and things may drag on.

Despite what your real estate agent or lender may tell you, unless we see a recession, high rates will pose challenges for anyone seeking financing in the next few years.  And if higher rates become the new normal, this will add pressure to the financial system overall. But we will eventually adapt.

8. Keep an eye on short-term treasuries. Know that the yield curve is inverted right now. Typically, short-term bond rates are lower than long-term rates, but today we’re upside down, and short-term rates are hovering around 5%. When inflation isn’t under control, it makes the dollar weaker, and treasuries generally become less attractive. But unless there is a reward for tying your money up, we may see investors flock to short-term treasuries that offer higher rates than long-term treasuries.  At what point are rates attractive enough to swap your stocks for bonds? It will likely be if or when we experience a sharp drop in the stock market.

As we look at the remainder of 2023, we can maintain our cautious optimism by positioning ourselves strategically for potential opportunities while staying a little more liquid for the challenges that may lie in the months ahead. As always - buckle up.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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