Mid-Year Economic and Market Check-In: What’s Going On and Where Are We Heading?

Now that the Summer is in full swing, with beautiful weather and plenty of outdoor activities for the whole family to enjoy, it is a good time to reflect on the financial markets and prepare for what may be coming our way in the second half of the year and beyond. The recovery has been solid so far this year, but there continues to be uncertainty ahead in the short term for markets and the economy. In the second quarter, stocks continued their promising 2023 recovery and bond yields stabilized on growing economic optimism and cooling inflation.

Global Economy

Recently, there have been several market-friendly economic indicators. Overall job creation in the U.S. and Canada continued to be resilient. While the creation of new jobs is welcome, the trend for the U.S. labour market does now appear to be slowing with wage pressures easing. This will be viewed favourably by the Fed in its ongoing battle with inflation. U.S. house prices also posted their largest annual drop in 11 years. And a survey of U.S. small and medium size businesses revealed hiring, sales expectations and credit availability have slowed, which are also positive indicators in the inflationary fight.

The Bank of England, European Central Bank and Reserve Bank of Australia aligned monetary policy with the Fed in the U.S. and raised rates twice during the second quarter of the year.

The inflationary trend in the U.S. shows prices are easing, just at a slow pace. Inflation fell early in the quarter to 4.9%, its lowest level in nearly two years. However, core CPI, which excludes energy and food, crept up 0.44% later in Q2, led in part by housing costs and used car prices. The Fed also raised its target interest rate by another 25 basis points to 5-5.25% in May, the tenth raise in 15 months. Fed chair Powell then announced a “hawkish pause” in June, but signaled there might still be more hikes needed in the second half of 2023. The Fed’s next interest rate meeting is set for July 26.

Canadian inflation cooled through the quarter, from 5.2% to 3.4%, its lowest level since June 2021. According to Statistics Canada, this was largely due to lower gasoline prices although food and housing costs remain elevated. After a four-month break, the Bank of Canada hiked rates 25 basis points to 4.75%. The decision was based on concern over excess demand in the economy, a tight labour market, and increased housing market activity.

Stocks

U.S., Canadian and global stocks ended Q2 and the first half of 2023 in positive territory. Technology was again the leading sector with the Nasdaq logging its best start to a year on record and Apple becoming the first company to reach a market cap of US$3trillion. Many big tech names (especially those who are involved in Artificial Intelligence) released earnings which in general depicted a better picture than anticipated. Investors were comforted by these results. TSX gains were a bit a more modest as a result of its high exposure to the banking and oil sectors, but it is still significantly up from the October market low last year. It was a tough quarter for the banking sector which was rocked by the regional bank failures in the U.S. Global stock gains were somewhat held back too by a slower than expected post-pandemic recovery in China. However, Japanese stocks experienced a resurgence, with local indices reaching their highest level in 33 years. This growth is primarily driven by increasing demand from foreign investors.

Bonds

Despite briefly rising in May on uncertainty over the U.S. debt ceiling and concern about the U.S. regional banking sector after the demise of another bank, First Republic, bonds yields were stable in Q2.

Oil

Directed by Saudi Arabia, the world’s largest oil producer, OPEC announced a cut in oil production in April, reducing it by 1.1 million barrels a day. This was in response to oil prices dropping to their lowest level since late 2021. Saudi Arabia then introduced a second production cut two months later, reducing output by another one million barrels a day.

What we can expect now?

This round of rate hikes has sent a clear message: The battle against inflation is ongoing. Consumer demand for goods and services sector prices remain high, housing activity is increasing again while wage growth is much higher than historical averages. In response, central banks are prepared to increase rates further. But going forward, we expect to hear more questions on the ability of monetary policy alone to solve more structural economic issues, such as labour and housing market imbalances.

While no one knows whether the economic slowdown that so many are expecting will be a soft landing or a full-on recession, there aren't many strong indicators that point to a severe, long-lasting recession and it is still unclear when this slowdown will happen. One thing I am confident about is that the business cycle will continue to progress. After Winter, we will have Spring again. History has shown us the best strategies are to take a disciplined approach to investing, stay focused on your long-term goals and keep your emotions out of investing. Well-diversified, quality portfolios have always recovered and continued growing after every economic slowdown in the past and this time will be no different. When facing investing headwinds, brace yourself, do not be shaken by negative news, and stay hopeful as we monitor your portfolio while we ride out the storm.

Thank you for your continued trust in me and my team for the opportunity to assist you in working toward your financial goals. We are with you every step of your investment journey. Should you or anyone you care about have any questions regarding your portfolio, please do not hesitate to contact my office.