U.S. stock markets continue to trend up. But as optimism returns to Wall Street, Main Street USA continues to struggle. Retailers and restaurants have trouble finding workers, for example, and many prices that went up are hesitating to go down. Meanwhile, the geopolitical tensions with China, Russia, and North Korea seem to be increasing. But even with this backdrop and some negative economic data making frequent appearances, the major U.S. markets are trading close to all-time highs.
In fact, as of late July 2023, the DJIA and S&P 500 are within shouting distance of their all-time highs, and NASDAQ is not too far behind its peak as well. What’s going on here? To understand, we need to reconcile recent market advances with not-so-good economic data.
Too Far, Too Fast?
If you go back to the fall of 2022, many market pundits were suggesting that fundamental conditions might be supportive of a favorable environment for stock markets in 2023. Unemployment was trending down, there seemed to be consensus when the Fed might stop raising rates, corporate earnings were decent, and GDP growth was solid at 2.6% in the fourth quarter.
Fast forward to the end of the second quarter of 2023 and everything seemed to be coming up roses—at least as it related to the stock markets. In fact, through the end of the second quarter, these were the stats:
• The S&P 500 was up more than 16% year to date (YTD) and had turned in its best first half since 2019.
• NASDAQ was up an astonishing 31% plus YTD on its way to its best half since 1983.
• The Dow Jones Industrial Average had turned in a still-decent 3.9% YTD gain.
In other words, the markets covered quite a bit of ground in a very short period of time. And that’s not even the whole picture. So the recent rally begs the question, did the markets move too far and too fast?
The Markets Look Ahead
It can be challenging to reconcile why stock markets could perform well amidst a constant drip of negative economic news. At first glance, it just doesn’t make sense. But, the apparent disconnect between markets and the economy is actually normal, and fairly easily explained. This is because the economic data we receive every week is backwards looking. It tells us what has already happened. The Employment Situation Report, for example, reveals the previous week’s unemployment numbers. Most of the other monthly economic data captures what happened even further back, in the previous month, with some data reports going back two or three months. These days, that’s practically ancient history.
Stock markets, on the other hand, are forward-looking. In other words, the recent rally in the first half of 2023 was more about the markets (investors) feeling more positive about the future versus uncertain about the present. So, how far forward does the market look? Well, the answer to that depends on who you ask. But generally speaking, the markets look forward at least a couple of quarters, maybe even as much as 18 months. But even with this long-term outlook, markets can be volatile due to impulsive reactions to daily events and news. That’s why it’s always important to focus on long-term investment strategies, especially when planning for retirement.
Too Good to Be True?
Well, we might like to think that we will see nothing but sunny skies and smooth sailing going forward, but that’s not going to happen. It never does. Especially when you consider that the recent market rally has really occurred over a relatively short time period. That being said, the recent market rally is encouraging. In fact, strong rallies often occur in the beginning stages of a new bull market, and maybe we can look back five years from now and recognize that this was the case for our recent rally. Or maybe not.1
The Takeaway
As of the close of trading on July 27, the S&P 500 was still up 18.65% year to date. And that’s after a loss for the day of over half a percent.2 The U.S. stock markets can and do move faster than the U.S. economy, but longer-term, the two are absolutely connected. And while there are reasons to be optimistic, there are also plenty of reasons to proceed with caution. Sticking with the fundamentals and betting on exceptionally well-managed companies is a better strategy than acting on optimism and hope. Nothing wrong with optimism and hope, of course, but solid portfolios are built on reason and facts, not emotions. As such, it’s important for investors to take appropriate actions based on their long-term goals and reasonable expectations for the future.
Sources:
1 Disconnect Between the Markets & the Economy: Trying to reconcile recent market advances with not-so-good economic data; Copyright © 2023 RSW Publishing. All rights reserved. Distributed by Financial Media Exchange.
2 https://www.marketwatch.com/investing/index/spx
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