Last weekend, Chicago hosted its first ever NASCAR street race! Viewing the event was a joy as one was able to see the beautiful Chicago landscape as the racers whizzed around Grant Park and the surrounding area. Of course, what would an auto race be without a crash or two?!? Well, this one had plenty. Ultimately, Shane Van Gisbergen crossed the finish line first and became the first driver since 1963 to win his first official NASCAR race. At the same time, it seems like the finanical markets are acting a bit like the racing circuit lately, with some winners, some laggards, and plenty of crash and burns. Let’s take a look first at how the major asset classes have fared in 2023 and then what may be around the next blind turn…
Equities: NASCAR may think to rename itself “Nasdaq”, given how the Nasdaq performed during the first half 2023, up a red-lining 32%! Nasdaq along with any other tech heavy benchmarks acclerated ahead given the newfound obsession of Artificial Intelligence (“AI”) names. The S&P500 drafted behind the Nasdaq yet still enjoyed a 16.9% runup year-to-date (8.7% in 2Q23) given its market-cap weighting methodology. Sounds kinetic, but if you look under the hood, you’ll see a lack of breadth and extreme concentration of market returns around just a handful of stocks. In fact, if you remove the best twenty names from that 500, the other 480 collectively did about nothing. A more realistic measure of how most stocks are doing could be by referencing the Dow Jones Industrial Average, up 4.0% in 2Q23 and now up 4.9% year-to-date (“YTD”). In other words, there are few racecars but plenty of regular commuter vehicles out there.
Fixed Income: After a brutal 2022, bonds may have gotten around that hairpin turn as they have produced modest returns so far in 2023. The Bloomberg US Aggregate Bond Index is up 2.09% YTD but actually downshifted in the second quarter, losing 0.8%. Of course, fixed income returns have a lot to do with changes in interest rates. To understand the importance of this, see the chart below.
Alternatives: It’s been a bumpy ride for alts so far this year. Commodities* have struggled to find their lane this year, -3.4% and -5.4%, quarter-to-date (“QTD”) and YTD, respectively. Real Estate** continues to do decently after a horrendous 2022, now +1.41% and +3.5%, QTD and YTD, respectively. And we’ve found something of a frontrunner within the Long/Short space with Calamos Phineus Long/Short, up 5.1% & 7.4%, QTD and YTD, respectively. For the record, our preferred alternative benchmark, the Wilshire Liquid Alternative Index, posted a 1.4% QTD and 2.7% YTD returns.
Add it all up, it’s been a suprisingly solid start for most investors since the green flag waved to start 2023. To think that we have already contended with a mini-bank crisis, the threat of an unprecedented US debt default, stubborningly high inflation, a Fed that keeps raising interest rates…the list goes on, yet most investors are sitting on positive returns! Why? One of the main reasons is that the recession everyone expected to materialize hasn’t. That’s not to say that it won’t, but the US economy has remained quite resilient.
So where do we go from here? Well, the good news is that inflation continues to come down. It’s possible that we see the June CPI reading around 3.2% Year-Over-Year, getting ever so closer to that 2%+ Fed bogey. However, other recent economic data has shown to be pretty strong – in fact, too strong for the Fed’s liking. So the Fed will probably continue its anti-inflation fight by hiking rates another quarter point at its July meeting and have indicated a second hike later this year. This could prove to be too much for the consumer who is already feeling pinched from using up the pandemic extra paychecks, higher prices all around, student payments restarting, and more. The consumer personal savings rate which has averaged 8.9% since 1960 is now down to just 4.3% (see chart below). Without a strong consumer which makes up about 2/3rds of US GDP, the economy could backfire and sputter out.
To wrap it up, the market is definitely not firing on all cylinders right now. Chevy stole the show at the Chicago Street Fest (taking the 5 top spots) the same way the Megacap 8 and some other AI names did on the Big Board. Will the other racers show up in the second half of 2023 or will the Chevys burn out and head for the pit? Only time will tell. Other than a roll cage, there are ways to protect yourself. Get yourself an experienced professional wealth manager - aka the DWM Pit Crew - to align your financial plan, make your portfolio aerodynamic, and to ultimately steer you to that checkered flag!
Brett M. Detterbeck, CFA, CFP®
DETTERBECK WEALTH MANAGEMENT
* represented by the Parametric Commodity Strategy Fund
** represented by the TIAA Real Estate Fund