We are now just over halfway through the year. Looking back, the first six months of 2023 were quite strong for the broader market. The S&P 500 gained 16%, the Dow rose 3.8%, and the tech-heavy NASDAQ surged 32%.
However, it certainly wasn’t a straight ride up, as Wall Street had much to contend with in the first two quarters.
So, in today’s Market 360, let’s start by recapping the biggest events of each quarter, and then I’ll share my biggest prediction for the rest of 2023 (hint: it has to do with the Federal Reserve).
First quarter
The first quarter started on a stronger note but quickly took a dip in the market when the banking crisis began. In March, Silicon Valley Bank collapsed, marking the second-largest bank failure in U.S. history. Credit Suisse and Signature Bank also failed (First Republic Bank went under in the second quarter). Due to the banking crisis, the S&P Regional Banking ETF (KRE) dropped about 25% during the quarter.
The Federal Reserve also raised key interest rates by 25 basis points. That brought the federal funds rate from 4.75% to 5% – the highest level since October 2007.
Ultimately, though, the indices ended the quarter higher. The S&P 500 grew 7%, the Dow increased a measly 0.4%, and the NASDAQ jumped 16%.
Second quarter
The second quarter was quite strong for the stock market. The NASDAQ climbed up 13.1%, while the S&P 500 and the Dow rose 7.9% and 2.4%, respectively.
Small-cap stocks also staged a nice rally in the second quarter, with the Russell 2000 rising 4.8%. The bulk of that strength came in June, as the Russell 2000 surged 8.4%.
The catalyst behind the small-cap rally was the Russell Reconstitution. This is when the underperforming stocks are removed from the index and new stocks that are more representative of the current market environment are added. And we saw a lot of stocks just wake up and soar higher due to all the institutional buying pressure. (For more on the Russell Reconstitution, click here.)
More good news came in June when the Federal Open Market Committee (FOMC) unanimously voted to “pause” key interest rates, which was widely expected.
However, analysts didn’t expect the Fed’s “dot plot” to reveal that more rate hikes were forthcoming. Based on the Fed’s dot plot chart and FOMC members’ projections, we can now anticipate interest rates to be as high as 5.6% by the end of the year. That would mean two more rate hikes.
The energy market was also top of mind in the second quarter, due in large part to the Canada wildfires that started in late April.
With more than 400 active fires, more than 8.1 million acres of land have already burned in Canada (typically only 600,000 acres at this point during a normal wildfire season). The problem is that the ground in these boreal forests contains peat, which is next to impossible to put out until the snow falls again. As a result, the wildfires are anticipated to burn throughout the summer and until October, causing air quality concerns across the globe for the foreseeable future.
These fires constricted Canada’s crude oil output, which, in turn, weighed on energy stocks. Case in point: Energy Select Sector SPDR Fund (XLE) dropped 6% for the second quarter.
I should note that I do expect energy stocks to bounce back as second-quarter earnings announcement season gets underway. The accounting data I look at for stocks (things like sales earnings, margin expansion, return equity, cash flow, etc.) shows the companies with the fastest margin expansion are in the energy patch.
Normally when you have margin expansion, you have big surprises. The refiners are looking especially good because of the crack spreads. (A crack spread is the difference in pricing for a barrel of crude oil and the products refined from it.) The wider the spread, the more money oil refiners can make.
I should add that the big integrated energy companies, such as Exxon Mobil Corporation (XOM), have also boosted their production, so I expect the energy sector to turn around soon.
My Biggest Prediction for the Second Half of 2023
Now that we’ve discussed the first six months, let’s talk about what I expect to occur in the second half of the year:
The Federal Reserve will cut rates in December.
And they’ll be cutting rates early next year, too.
The reality is that there are a lot of factors that the Fed needs to consider.
First, it’s clear that the U.S. manufacturing sector remains in a recession. The Institute of Supply Management (ISM) manufacturing index in June was a major disappointment. And in my opinion, it would be very unwise for the Fed to raise key interest rates at its July meeting.
Inflation also continues to cool off. As we learned this week, the Consumer Price Index (CPI) rose 0.2% in June and is now running at a 3% annual pace. The Producer Price Index (PPI) rose 0.1% in June and rose 0.1% in the last 12 months – the lowest annual pace in almost three years.
Now, there was a possibility that the Fed would raise rates at the July FOMC meeting at the end of the month. The fact is that market rates surging in the wake of a better-than-expected jobs report from the ADP but didn’t drop significantly after the soft Labor Department employment report. Market rates soared to the highest levels since October 2022, with the 10-year Treasury yield rising above 4.0%, and the two-year Treasury yield surging above 5%.
However, with the positive CPI and PPI reports this week, the 10-year Treasury yield fell back below 3.8% and the two-year Treasury yield slipped under 5%. The Fed does not fight market rates, so with Treasury yields pulling back from their recent highs, I personally do not think the Fed should raise rates in July.
Clearly, the Fed has a lot to think about ahead of its July FOMC meeting. It’s unfortunate that some of the factors it will consider are unreliable economic data that is tainted by wild seasonal adjustments and endless revisions (i.e., employment data).
Still, the Fed likes to stay out of the political spotlight, so I predict that the central bank will start to cut rates in December and into the first half of 2024 in order to stimulate overall economic growth.
Finding the Winners
Just as there were winners and losers in the first half 2023, there will be winners and losers in the second half.
So, how do you pick a winner from a loser?
It’s simple: Focus on stocks with superior fundamentals.
That’s where my Growth Investor members have the advantage.
In the first quarter, my Growth Investor stocks posted an average 17% earnings surprise. Our Growth Investor stocks are currently characterized by 102.7% average forecasted earnings growth. In comparison, the S&P 500 is expected to post a 7.2% earnings decline in the second quarter. Revenue is forecast to slip 0.3%.
So, as investors grow more fundamentally focused, I expect them to flock to my Growth Investor stocks.
The bottom line: My Growth Investor Buy Lists are dominated by fundamentally superior stocks, and I fully anticipate that they will emerge as market leaders as the year rolls on.
For access to my Growth Investor Buy Lists, join me at Growth Investor today.
(If you are already a Growth Investor subscriber, you can log in here.)
Sincerely,
Louis Navellier
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Exxon Mobil Corporation (XOM)
