Q2 | 23
Second Quarter Newsletter 2023
As we enter the second half of 2023, sentiment from investors is bullish but remains confused on the outlook for the economy and financial assets. Most investors entered 2023 with a view of an upcoming U.S. recession and positioned toward companies that would benefit from China’s reopening. As the year unfolded, recession turned into resiliency, inflation rolled over and financial asset positioning reversed. Growth stocks (technology) flourished, cyclicals suffered, and interest rates went up, not down as one would expect in a recession.
The market knew that Covid payments had left the consumer flush. With 70% of the U.S. economy driven by the consumer, their impact was significant. Over the last 12 months, U.S. companies have added more jobs than any other one-year period in history. The 2-year U.S. Treasury bond yield hit its highest level since 2007 at 4.9% at the end of the quarter. For the first six months of the year, stock benchmarks find themselves in positive territory. The key drivers of consumer spending are income, wealth, credit, and confidence. Recent economic growth has been surprisingly robust. Wage growth is rising in a tight labour market. Recent wealth gains on homes have acted to offset tighter lending standards on credit cards and consumer loans. So far-so good for consumer spending. The market is now attempting to figure out when the consumer will run out of excess cash.
In the second quarter of 2023, in USD currency the S&P 500 rose 8.7% and the Canadian stock market climbed 1.1%. Leadership in Q2 centered around growth stocks (Technology, Consumer Discretionary, Communication Services) although cyclicals, such as Industrials and Financials had a nice bounce. In Q2, stocks outperformed bonds. Both Canadian and U.S. bonds posted small negative returns of -0.7% and -2.2% respectively. The Canadian dollar gained 2.1% to the U.S. dollar.
Year-to-date, stocks and bonds both had positive returns. The U.S. market outperformed Canada (S&P 500 +14.2% vs. TSX up 5.7% in Canadian dollars). The dispersion between the best and worst sectors was dramatic. Technology stocks have enjoyed their strongest half-year performance in more than 20 years. However, all of Technology’s relative outperformance has come from multiple expansion. In addition, the market breadth is very narrow, as the six largest Technology companies accounted for 100% of the sector’s relative outperformance. Energy and Utilities both fell 7%. Bonds rose in the low single digits.