"Tale of Two Markets"

Published: July 06, 2023

Black White Knight Chess Pieces Facing Off

The stock market performance is divided into at least two markets; one is made of big winners and the other is made of many major companies that are just 'meh'!

That's why we will have a situation where the NASDAQ 100 is almost 40% period. However, if you remove only 6 companies from the NASDAQ 100 you end up with a very different picture. The S&P at this point of the year is up about 16% and the Dow Jones, a little farther behind, is up only about 3%. Earlier in the year in my January client update, I described the US economy as a "moving train". A moving train does not go into reverse (recession) until it first slows down, then stops; and then maybe it can go into reverse.

At this present moment the much anticipated recession is not happening and the economy is steadily expanding as the first quarter GDP showed (up 2%). I am happy that I was in the camp of those who doubted that there would be an automatic recession just because the Fed was increasing interest rates. At the onset of the year, many economic indicators were still flashing bright green and there was no indication that we were heading into an imminent recession.

S&P 500 Index: Post-War Recession and Non-Recession Bulls Scenarios for 2023

The above chart, included in my January client update, highlighted the S&P 500's potential for positive performance even in the face of a recession. However, as we know, markets are not solely driven by rationality and objective analysis. The fear of missing out (FOMO) remains a powerful force, inherent to human behavior and, consequently, market dynamics. FOMO triggers periods of exuberant growth but can also result in occasional disappointments. Recognizing this cyclical nature, it becomes crucial to maintain a diversified portfolio and remain invested in the market for the majority of the time.

Looking ahead to the remainder of the year, I anticipate a gradual upward grind in the market, punctuated by consolidation phases. Should the Federal Reserve enact a couple more rate hikes, we can expect a slowing economy without tipping into a recession. Inflation appears to be under control, and it would not surprise me if this year marks the beginning of a multi-year bull market. However, it's important to note that market progress is rarely linear. Periodic sell-offs and consolidation of gains are likely on the horizon, particularly between July and October. Despite these potential challenges, I maintain an optimistic outlook for the year, anticipating a positive conclusion.