2023: The First Half in Numbers

Over the last 60 years, bear markets have coincided with recessions. One notable exception was the one-day market crash in 1987. Additionally, a 21% drop in the S&P 500 Index in the mid-1960s centered around a sharp slowdown in economic growth. The yield curve briefly inverted, but a recession failed to materialize.

In 2022, the S&P 500 Index entered a bear market tied to the Federal Reserve’s abrupt shift in monetary policy, not a recession.

Cheap money and QE were replaced by sharp rate hikes and QT. In hindsight, the sell-off was predictable amid a compression in valuations.

While the S&P 500 has yet to hit a new high, a 20%+ rally from the bottom signals the start of a new bull market.

A kinder, gentler approach has replaced last year’s aggressive posture. A crucial factor that has propelled the success of several prominent tech companies is the soaring interest in businesses that aim to capitalize on artificial intelligence.

Just as few folks anticipated the aggressive tone from the Fed and subsequent bear market in 2022, this year’s rally in the S&P 500 has caught many off guard, though the rally has not been broad-based.

Of course, the year hasn’t been without its share of drama. Silicon Valley’s swift demise precipitated a banking crisis that required intervention by the Fed and the FDIC.

While we are not entirely out of the woods, all has been quiet following the turmoil at Republic Bank and its acquisition by JPMorgan.

As we roll into the second half of 2023, the labor market is slowly starting to cool (Table 12), and inflation is gradually moderating (Table 15).

It is still premature for the Fed to declare “mission accomplished” on inflation, and leading economic indicators are still telegraphing a 2023 recession, but the much-advertised economic contraction remains at bay.

Table 1: Stock Index Performance
Index	YTD %
Dow Jones
Dow Jones Industrial Avg	3.80
Transportation Average	15.99
Utility Average	-6.28
65 Composite	5.56
Total Stock Market	15.41
NASDAQ
NASDAQ Composite	31.73
NASDAQ 100	38.84
Biotech	-3.19
Standard & Poor’s
500 Index	15.91
100 Index	21.57
MidCap 400	8.11
SmallCap 600	5.24
SuperComp 1500	15.35
Other U.S. Indexes
NYSE Composite	4.69
Russell 1000	15.86
Russell 2000	7.44
Russell 3000	15.36
PHLX Gold/Silver	-0.68
PHLX Oil Service	-5.49
PHLX Semiconductor	45.18
CBOE Volatility	-38.99
KBW Bank	-20.21
Value Line (Geometric)	6.95
Alerian MLP Index	65.96

Source: FactSet, Dow Jones Market Data, WSJ
YTD: December 30, 2022‐June 30, 2023

Earnings growth flattens

Earnings growth has slowed from its heady pace of 2021. That was to be expected.

Refinitiv reported that S&P 500 operating EPS for Q1 2023 was $54.83 per share. This is slightly lower than the previous quarter’s $53.15 but below the record high of $57.62 in Q2 2022 and Q3’s $56.02.

The economy is modestly expanding, but costs are rising, margins are under pressure, and the strong dollar has pressured multinationals as they translate overseas sales into more expensive dollars.

By the smallest of margins, the S&P 500 has avoided an earnings recession, at least so far, as it eked out a tiny gain in Q1 2023 profits. Two consecutive quarterly declines would be considered an earnings recession.

Table 2: S&P 500 Operating Earnings
Date	Percent change vs. 1 year ago
Q1 2023	0.1
Q4 2022	-3.2
Q3 2022	4.4
Q2 2022	8.4
Q1 2022	11.4

Source: Refinitiv

S&P 500 Q1 2023 buybacks tick up again, as sector expenditures shift

S&P 500 Q1 2023 buybacks rose 2.1% to $215.5 billion but were down 23.3% from the Q1 2022 $281.0 billion record, according to S&P 500 Global.

The 12-month March 2023 expenditure of $857.2 billion was down from the $922.7 billion in fiscal 2022.

Buybacks among financials jumped to $46.9 billion, topping tech’s $45.9 billion for the first time since Q3 2017. Energy decreased slightly to $19.3 billion, representing 9.0% of all buybacks.

The new net buyback excise tax of 1%, which began in 2023, reduced Q1 2023 operating earnings by 0.45% and GAAP earnings by 0.49%.

Buybacks remained top-heavy with the top 20 companies accounting for 48.6% of Q1 2023 buybacks, above the historical average of 47.1%.

“Companies, led by financials, pushed buybacks up slightly. If financials had not returned to the buyback market, the 2.1% expenditure increase would have been a 10.6% decline, as 8 of the 11 sectors pulled back,” said Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indexes.

“The EPS impact, due to share-count reduction, also declined, as 18.5% of the issues increased their Q1 2023 EPS year-over-year by at least 4% compared to 19.4% last quarter,” Silverblatt added.

“Going forward and given the recent banking issues and the current regulatory reviews, banks may again pull back on buybacks to protect their dividends for what is expected to be a more difficult Fed stress test due to stricter and more extensive regulations,” he said.

Table 3: S&P 500 Return of Capital
	Operating earnings	Stock buybacks	Cash dividends
Q1 2023	$439.0 billion	$215.5 billion	$148.8 billion
Q4 2022	$421.6	$211.2	$146.1
Q3 2022	$422.9	$210.8	$140.3
Q2 2022	$395.0	$219.6	$140.6
Q1 2022	$417.2	$281.0	$137.6
Q4 2021	480.4	270.1	133.9
Q3 2021	441.3	234.6	130.0
Q2 2021	440.0	198.8	123.4
Q1 2021	401.2	178.1	123.9

Source: S&P Dow Jones Indexes

Key S&P 500 sectors—2022’s laggards lead the way in 2023

Against a backdrop of negative sentiment late last year, the S&P 500’s rally has been unexpected and impressive, though outsized gains have been confined to three sectors: technology, communication services and consumer discretionary. Notably, these were the worst performers in 2022 through the end of June.

I have included the 2022 sector performance for illustrative purposes.

Last year’s top performers, energy, utilities and consumer staples, have lagged badly this year.

However, leadership this year has been narrow. Although the broader market began to participate in the rally in June, 8 of the 11 sectors have lagged well behind the S&P 500’s 15.91% advance in the first half of the year.

Table 4: Standard & Poor’s Key U.S. Sectors
2023		2022
Category	YTD%	Category	YTD% through June 30, 2022
Info Tech	42.06	Energy	29.21
Comm service	35.58	Utilities	-2.00
Consumer discretionary	32.33	Consumer staples	-6.78
S&P 500 Index	15.91	Health care	-9.1
Industrials	9.22	Industrials	-17.49
Materials	6.61	Materials	-18.69
Real estate	1.85	Financials	-19.49
Consumer staples	-0.04	S&P 500 Index	-20.58
Financials	-1.51	Real estate	-21.24
Health care	-2.33	Info tech	-27.25
Utilities	-7.16	Communication services	-30.45
Energy	-7.26	Consumer discretionary	-33.09

Source: StockCharts
2023 YTD through 6.30.23
2022 YTD through 6.30.22

Around the world

As we’ve seen in the U.S., global markets have performed much better this year (Table 5), with Japan having a banner year. In part, banking concerns have faded. In part, the Fed has significantly slowed the pace of rate hikes.

Yet, price stability in Europe has been elusive, and several global central banks outside Japan have yet to signal a softer pace.

Table 6 illustrates that the dollar has had little impact on overall performance.

Table 5: Global Indexes
	YTD %
The Global Dow (World)	11.02
DJ Global ex U.S. (World)	7.5
Asia Pacific
Asia Dow	8.71
All Ordinaries (Australia)	2.49
S&P/ASX 200 (Australia)	2.34
H-Share Index (China)	-4.18
Shanghai Composite (China)	3.65
Shenzhen Composite (China)	3.73
Hang Seng (Hong Kong)	-4.37
S&P BSE Sensex (India)	6.37
S&P CNX Nifty (India)	5.99
JSX Index (Indonesia)	-2.76
Nikkei 225 (Japan)	27.19
FTSE Bursa Malaysia KLCI (Malaysia)	-7.94
S&P/NZX 50 (New Zealand)	3.86
PSEi Index (Philippines)	-1.5
KOSPI (South Korea)	14.66
Straits Times (Singapore)	-1.4
SET (Thailand)	-9.92
Europe
Europe Dow	10.39
Euro Stoxx	12.53
Stoxx Europe 600	8.72
ATX (Austria)	0.91
Bel-20 (Belgium)	-4.27
OMX Copenhagen (Denmark)	11.17
OMX Helsinki (Finland)	-7.89
CAC 40 (France)	14.31
DAX (Germany)	15.98
Athex Composite (Greece)	37.52
FTSE MIB (Italy)	19.08
AEX (Netherlands)	12.33
OBX Index (Norway)	1.65
PSI 20 (Portugal)	3.39
RTS Index (Russia)	n/a
FTSE/JSE Africa All Share (South Africa)	4.08
IBEX 35 (Spain)	16.57
OMX Stockholm 30 (Sweden)	8.42
Swiss Market (Switzerland)	5.13
BIST 100 (Turkey)	4.54
UK: FTSE 100	1.07
UK: FTSE 250	-2.31

Sources: Factset; Dow Jones Market, WSJ YTD thru 6.30.23

Table 6: Other Global Indexes
	YTD% in USD	YTD (%) in local currencies
MSCI EAFE	9.36	10.08
MSCI World	13.99	14.01
MSCI World Ex-U.S.A.	9.36	9.46
MSCI EM	3.46	4.11

Source: MSCI.com, YTD through 6.30.2023

Style—growth resumes its dominance

A year ago, large-cap value gave up 11.51% versus a nearly 20% decline in core shares and a 27.66% drop in growth for the first half of the year.

During the first six months of 2023, growth has shined, especially for large caps. Year-to-date, large-cap growth is up 21.13%, core is up 16.88% and value is up 12.06%.

The same pattern holds true for mid-cap and small-cap shares, but the gap in performance between growth and value is much smaller.

Following a rough 2022, bond funds are behaving much better this year amid a more stable environment for yields.

Table 7: Selected Returns
	YTD %	1-year annualized change %	3-year annualized change %	5-year annualized change %
U.S. equity ETFs
iShares S&P 500 Growth ETF	21.13	18.04	11.60	12.81
iShares Core S&P 500 ETF	16.88	19.57	14.56	12.27
iShares S&P 500 Value ETF	12.06	19.78	16.58	10.39
iShares Russell Mid-Cap 400 Growth ETF	10.36	19.08	11.12	6.95
iShares Core S&P Mid-Cap ETF	8.84	17.61	15.40	7.73
iShares Russell Mid-Cap 400 Value ETF	7.11	15.84	19.38	7.79
iShares S&P Small-Cap 600 Growth ETF	6.97	10.44	11.64	4.99
iShares Core S&P Small-Cap ETF	6.05	9.69	15.09	5.18
iShares S&P Small-Cap 600 Value ETF	4.95	8.63	18.10	4.73
Global Equity ETFs
iShares Core MSCI Total Intl Stock ETF	9.61	12.69	7.57	3.59
iShares Europe ETF	13.72	21.64	10.98	5.30
iShares Latin America 40 ETF	20.31	32.38	16.62	3.98
iShares Asia/Pacific Dividend ETF	0.40	6.16	5.98	-0.39
iShares MSCI Emerging Markets ETF	5.12	1.12	1.66	0.32
Bond ETFs
iShares U.S. Treasury Bond ETF	1.92	-2.08	-4.85	0.35
iShares 10+ Year Investment Grade Corp Bond ETF	5.51	1.00	-6.17	1.41
iShares Core U.S. Aggregate Bond ETF	2.26	-0.93	-3.97	0.74
iShares iBoxx $ High Yield Corporate Bond ETF	4.72	8.07	2.06	2.39
iShares Preferred and Income Securities ETF	4.87	0.81	1.75	1.52
iShares Core International Aggregate Bond ETF	3.36	0.82	-2.62	0.83
iShares J.P. Morgan USD EM Bond ETF	3.66	6.53	-3.47	0.33
iShares J.P. Morgan EM Corporate Bond ETF	2.96	4.80	-1.27	1.89
iShares National Muni Bond ETF	2.43	2.97	-0.49	1.80
Sector Equity ETFs
iShares U.S. Technology ETF	46.50	36.96	17.84	20.27
iShares U.S. Industrials ETF	10.52	21.70	13.18	9.36
iShares Global Consumer Staples ETF	-0.22	5.26	18.43	13.44
iShares U.S. Financials ETF	-0.25	8.79	12.51	6.85
iShares U.S. Communications ETF	36.02	18.38	6.99	—
iShares Core U.S. REIT ETF	5.33	-0.18	8.85	4.50
iShares U.S. Utilities ETF	-4.31	-2.00	8.05	7.26
iShares U.S. Health care ETF	-0.79	5.44	10.36	10.95
iShares U.S. Consumer Discretionary ETF	25.30	26.15	9.75	8.75
iShares U.S. Energy ETF	-6.48	16.60	33.69	4.86

Source: iShares
The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted.
Data through 6.30.2023
1-year, 3-year, 5-year returns as of 6.30.2022, 6.30.2020, 6.30.2018, respectively

Yields stabilize

The Fed has control over the short end of the yield curve and influences rates on the longer end of the curve.

Yields have risen since the beginning of the year, as early expectations that the Fed would reach its terminal rate early in the year faded.

The inversion in the yield curve, which has historically been a reliable recession indicator, steepened to its sharpest level since 1981 (10-year/3-month).

Using the last eight recessions as a guide, on average a recession has begun 10 months after the 10-year/3-month curve inverts. Through June, the curve has been inverted for eight months.

The shortest time to inversion and recession occurred in 1973—5 months, and the longest lead time was the 2007–09 recession—16 months.

Table 8: Treasury Rates (Monthly Average)
Month	3-Month T-Bill	2-Year Treasury Yield	10-Year Treasury Yield	30-Year Treasury Yield	10-year minus 2-year*	10-year minus 3-month*	10-year breakeven inflation rate**
Jan 2023	4.54	4.21	3.53	3.66	-0.68	-1.16	2.24
Feb	4.65	4.53	3.75	3.80	-0.79	-1.04	2.33
Mar	4.69	4.30	3.66	3.77	-0.64	-1.20	2.30
Apr	4.92	4.02	3.46	3.68	-0.56	-1.61	2.27
May	5.14	4.13	3.57	3.86	-0.56	-1.73	2.21
Jun	5.16	4.64	3.75	3.87	-0.89	-1.67	2.20

Source: St. Louis Federal Reserve
*Proxy for the yield curve
**Breakeven Rate: 10-year Treasury yield minus 10-year TIPs yield, which provides a proxy for 10-year inflation expectations (what yield an investor is willing to give up for inflation protection).

Corporate bonds

As with Treasuries, investment-grade corporate bond yields and lower-grade high-yield bonds have also risen.

The spread between high-yield bonds and Treasuries temporarily widened in March as the banking failures sparked economic concerns, but generally speaking, spreads have been stable this year.

The spread is off the 2021 low of 3.02%, but 2023’s range is not concerning and not signaling a recession. In other words, the bond market has been much more sanguine regarding economic prospects than some economic forecasters.

Table 9: ICE BofA Merrill Lynch U.S. Corporate Effective Yield (Monthly Average)
Month	AAA	AA	A	BBB	BB	B	CCC or below	High-yield spread*
Jan 2023	4.37	4.57	4.94	5.42	6.53	8.35	14.44	4.34
Feb	4.58	4.79	5.12	5.59	6.82	8.45	14.15	4.20
Mar	4.55	4.80	5.24	5.73	7.14	8.85	14.95	4.69
Apr	4.30	4.55	4.99	5.46	6.58	8.58	14.78	4.57
May	4.45	4.70	5.16	5.65	6.87	8.76	14.62	4.69
Jun	4.62	4.88	5.33	5.80	6.91	8.67	14.10	4.29

Source: St. Louis Federal Reserve.
(BBB) is the lowest grade of investment debt.
*ICE BofA US High-Yield Index Option-Adjusted Spread—a proxy for the difference between the yield on high-yield bonds and long-term Treasuries.

Stable commodities

Commodity prices remain elevated and are down from last year’s peak. Russia’s war against Ukraine played a big role in pushing up prices last year, but today’s story is economic uncertainty in the U.S. and China’s tepid economic recovery following draconian lockdowns.

The value of the dollar has slipped from its high, as the Fed has embarked on a more cautious approach. Meanwhile, various central banks around the world, including the European Central Bank, have yet to back away from a hawkish posture.

Gold is an enigma. It has a long history as a store of value, but it’s not a currency, nor does it back any currency.

Gold has traditionally been considered a hedge against inflation, but the shiny medal failed to rally in the face of the sharp rise in inflation.

Instead, the strength in the dollar and an aggressive Fed drove prices down. As inflation slowly eased, gold pushed higher against the backdrop of a more cautious Fed and a dip in the dollar. Still, it’s off its early May peak of $2,056 per ounce.

Table 10: Key Commodities/Indexes
	Jun 30, 2023	Dec 30, 2022
WTI crude spot price	$70.66	$80.16
Gold front month contract	1,929.40	1,826.20
Nominal Broad U.S. Dollar Index	119.89	121.40
CRB Commodity Index	291.36	301.33

Source: St. Louis Federal Reserve, Trading Economics, MarketWatch

GDP posts modest gain

Technical factors were responsible for a ‘technical recession’ in the first half of 2022. But consumer spending never declined, and GDP expanded in the second half of 2022, hitting new highs.

It’s worth noting that the National Bureau of Economic Research (NBER) did not officially classify last year’s two-quarter decline as a recession, as factors such as job growth remained strong. The NBER is responsible for identifying periods of economic expansion and contraction.

Given today’s high rate of inflation, nominal GDP has easily outpaced real GDP.

Table 11: Gross Domestic Product
	Annualized quarterly change in Real GDP (%)	Real GDP annualized in 2012 dollars (trillions)	Nominal GDP Annualized nominal GDP (trillions)
Q1 2022	-1.6%	$19.92	$24.74
Q2	-0.6	19.90	25.25
Q3 td>	3.2	20.05	25.72
Q4	2.6	20.18	26.14
Q1 2023	2.0	20.28	26.53

Source: St. Louis Federal Reserve

A red-hot job market begins to cool off

The growth of nonfarm payrolls continues to exceed 200,000. Since the start of the year, payrolls have averaged a robust 278,000 per month.

The narrative isn’t quite as optimistic if we exclude federal, state and local government jobs and public education.

During four of the last five months, private-sector payrolls have totaled less than 200,000 per month. The average over the last six months has been 215,000 per month.

It’s not recessionary, it could be viewed as sustainable, and it is more in line with payroll growth during the 2010s, but it also suggests that private-sector economic growth is slowing down.

Meanwhile, job openings have eased but remain very high as employers in some industries struggle to fill vacancies.

The still-high level of job openings is part of the Federal Reserve’s strategy to engineer a soft landing. The aim is to slow down the economy and reduce job vacancies without causing a significant rise in the unemployment rate.

Never before in the modern era has the economy experienced such a labor shortage. In the past, a slowing or contracting economy would raise the unemployment rate. Today, the Fed hopes to avoid a significant rise in layoffs by targeting job openings.

So far, the Fed has been successful, but its tools are blunt. Central bankers can’t simply use the fed funds rate to fine-tune key metrics. Slower growth has gradually reduced job vacancies, but layoffs have ticked higher—call it a rolling recession.

Yet, overall, the jobless rate remains quite low.

Table 12: Key Labor Market Indicators
	Nonfarm payrolls (000)	Private sector (000)	Unemployment rate %
Jan 2023	472	353	3.4
Feb	248	193	3.6
Mar	217	157	3.5
Apr	217	179	3.4
May	306	259	3.7
Jun	209	149	3.6

Source: St. Louis Federal Reserve

Table 13: Job Vacancies
	Job openings (millions)
Jan 2023	10.6
Feb	10.0
Mar	9.7
Apr	10.3
May	9.8

Source: St. Louis Federal Reserve

Money supply growth falters

Beginning in May 2020, year-over-year M2 growth exceeded 20% for 50 straight weeks. The rise was unprecedented. The surge compares with the average growth rate of 7.1% since 1960.

In Milton Friedman’s world, inflation would have exceeded 20%. That didn’t happen, but the inflation genie came out of the bottle, with the CPI hitting its fastest pace since the early 1980s.

While economists continue to debate the link between the money supply and the economy, the unprecedented surge in M2 probably played a role in the burst in inflation.

Today, growth in the money supply has collapsed. Over the last 60 years, we’ve never experienced a year-over-year decline in M2.

During the mid-1990s, the growth of M2 almost came to a halt. The Fed’s 1994 rate-hike campaign helped achieve a soft landing, not a recession.

The case for a recession and an eventual return to price stability springs from today’s collapse in M2.

However, the money supply (M2) is only half the equation. The velocity (V), or turnover of money in the economy, is the other half.

M2 x V = Nominal GDP (Real GDP x Inflation)

Velocity has crept higher, which has offset some of the anxieties caused by the drop in the money supply.

Table 14: Money Supply Growth
	M2 money supply percent change vs. 1 year ago
Jan 2023	-1.6
Feb	-2.3
Mar	-3.9
Apr	-4.6
May	-4.0

Source: St. Louis Federal Reserve
M2 = Cash + checkable deposits + savings deposits (including money market deposit accounts) + CDs under $100,000 + shares in retail money market mutual funds; excludes retirement account balances
M2 average growth rate since 1960: 7.1%.

Inflation eases but still too high

There are two important measures of inflation that investors keep tabs on—the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE Price Index). Both are broad-based. The Fed favors the broader PCE Price Index.

Last year, rising food and energy prices pushed headline inflation above the rate of core inflation. We’re in a new year.

Today, falling energy prices have pulled headline inflation sharply lower amid easy year-over-year comparisons. Recall soaring energy prices in the first half of 2022. This year, the price of oil is down since the start of the year’see Table 10.

Still, at 3.0%, the headline CPI is above the Fed’s 2% target.

The core CPI has been sticky, but the rate is gradually slowing. Through May, the core PCE Price Index has been steady.

Table 15: Key Measure of Inflation
	PCE Price Index y/y	Core PCE Price Index y/y	CPI y/y	Core CPI y/y
Jan 2023	5.4%	4.7%	6.4	5.6
Feb	5.0	4.7	6.0	5.5
Mar	4.2	4.6	5.0	5.6
Apr	4.3	4.7	4.9	5.5
May	3.8	4.6	4.0	5.3
June	—	—	3.0	4.8

Source: St. Louis Federal Reserve, US BLS