Trying to reconcile recent market advances with not-so-good economic data.
The discrepancy between markets and the economy continues to cause confusion. While optimism returns to Wall Street, Main Street USA continues to grapple with numerous challenges. Despite ongoing social unrest, rising geopolitical tensions with China, Russia, and North Korea, and a steady stream of negative economic data, the major U.S. stock markets are trading at or near all-time highs as of late July 2023.
Indeed, the DJIA and S&P 500 are on the cusp of their historical peaks, with the NASDAQ not far behind. This remarkable performance raises the question of whether the markets have surged too quickly and too far.
A Rapid Ascent
Rewind to the fall of 2022, many market analysts were cautiously optimistic about 2023. Unemployment was declining, there was a consensus on when the Fed might halt rate hikes, corporate earnings were solid, and GDP growth had posted a robust 2.6% in Q4. Fast forward to the end of the second quarter of 2023, and the markets have undergone a remarkable transformation. By that point:
- The S&P 500 had surged more than 16% year-to-date, delivering its strongest first half since 2019.
- The NASDAQ had achieved a staggering year-to-date gain of over 31%, marking its best half since 1983.
- The DJIA had notched a respectable 3.9% year-to-date increase.
In short, the markets covered significant ground in a relatively short span. However, this upward trajectory prompts a critical question: Have the markets moved too swiftly and too far?
Forward-Looking Markets vs. Backward-Looking Data
The apparent paradox of stock markets performing well amid a barrage of negative economic news can be perplexing. However, this disconnect between the markets and the economy is not unusual.
The economic data we receive regularly reflects past events; it tells us what has already happened. For instance, the Employment Situation Report reports the previous week’s unemployment figures and many other monthly economic reports capture data from the previous month, with some even extending back two or three months.
In contrast, stock markets are forward-looking. They respond to expectations about the future rather than the current situation. The rally in the first half of 2023 was largely driven by optimism about what lies ahead, even as economic data from that period continued to show signs of stress.
The Outlook
Does this mean smooth sailing ahead? Not necessarily, especially considering the recent rally occurred over a relatively short time frame. However, such strong rallies are not uncommon at the beginning stages of new bull markets, and time will tell whether this holds true in hindsight.
What Investors Should Do
Investors should recognize that while U.S. stock markets can move faster than the broader economy, they remain interconnected over the long term. It’s essential to manage expectations and ensure that investment portfolios are appropriately diversified based on individual risk tolerance. Periodic rebalancing, rather than short-term trading, helps maintain the intended asset allocation.
For personalized guidance, investors should consult with their financial advisors, who can provide valuable insights and tailor strategies to individual financial goals and circumstances.
