September 29, 2023


Learn Business From Experience

B&F Views Second Quarter 2023

8 min read

Quarterly Funding Overview 

The financial system grew by 2% within the first quarter and is anticipated to develop by about 2.3% within the second quarter, based mostly on extensively adopted indicator from the Federal Reserve Financial institution of Atlanta. At the same time as most economists count on a slowdown in financial progress and an increase in unemployment, the extensively anticipated recession of 2023 stays elusive. 

The inventory market rally, which started within the fourth quarter of 2022 continued all through the primary half of 2023, buoyed by a resilient labor market and a pause in rate of interest hikes by the U.S. Federal Reserve. The S&P 500 Index of enormous U.S. corporations rose 8.7% within the second quarter and is up 16.9% year-to- date. The rally has been powered primarily by giant (largely know-how) corporations, with smaller corporations (represented by the Russell 2000 Index) rising solely 5.2% within the quarter and eight.1% to date this yr. The MSCI EAFE index of worldwide shares rose 3.0% within the quarter and is up 11.7% this yr. The bond market has been unstable, swinging between optimism that rate of interest hikes have been over and acceptance that extra are coming. The benchmark 10-year Treasury yield ended the second quarter at 3.81%, roughly the place it started the yr however up for the quarter. Consequently, bonds misplaced 0.8% throughout the second quarter however have nonetheless gained 2.1% for the yr as increased yields helped to offset falling costs (bond costs fall when market rates of interest rise). Excessive Yield “Junk” bonds rose 1.8% throughout the quarter, representing optimism about company funds, no less than within the short-term. The Dow Jones U.S. Actual Property Index rose 2.4% throughout the quarter.

Economic system

As soon as once more, the financial system isn’t at the moment in a recession, although the chance that one is coming has risen in latest weeks. Trying on the treasury yield curve, the place short-term rates of interest are considerably increased than longer-term charges (the yield curve is inverted), this means a reasonably excessive chance of a recession within the near-term. An inversion of the yield curve doesn’t assure {that a} recession is coming, nevertheless it has preceded each recession since 1950.

Extra importantly, trying below the hood at totally different segments of the financial system, a number of elements counsel that enterprise and shopper spending are prone to sluggish within the coming months. From layoffs in key financial sectors like know-how to weak point in business actual property markets and low private financial savings charges, the financial system seems to be to be slowing from its present tempo of two% progress. That doesn’t imply a recession is imminent, nevertheless it does imply that there’s much less room to soak up shocks if (or extra doubtless when) they arrive.

Q2 2023


The Fed’s marketing campaign to focus on inflation by elevating rates of interest appears to have been profitable. Inflation has fallen from its excessive final summer season of 9.1% to only 3.0% (year-over-year) in June. Trying on the elements of inflation, most have cooled significantly. Even housing prices are beginning to ease a bit. We count on to see inflation moderating to round 3.5% by year-end and maybe 2-3% by the tip of 2024, which might enable the Federal Reserve to start reducing rates of interest. That is what the market appears to be anticipating on condition that long-term Treasury rates of interest are decrease than short-term charges.

The wild card stays the labor drive, which has shrunk over the previous few years. Ability gaps (the distinction between what employers want and what they will discover within the market) stay stubbornly excessive, preserving upward stress on wages whereas additionally placing a lid on how excessive unemployment can rise. Employment is a lagging indicator of financial well being, so we have now to watch out putting an excessive amount of hope in low unemployment (which is all the time lowest proper earlier than a recession begins), however the energy of the labor market does give some forecasters the boldness to counsel that any impending recession may be comparatively gentle or short-lived (or each).

Development is trying a bit firmer all over the world than it did even earlier this yr. Whereas manufacturing has hit a little bit of a comfortable patch, most nations proceed to point out some degree of growth. Decrease vitality costs in Europe and a post-COVID restoration in China are causes for some optimism.


Many elements have contributed to a slowing financial system, and it’s not a foregone conclusion {that a} recession should happen. As we famous final quarter and above, it does appear extra doubtless, although the consensus appears to level to a recession starting in 2024 quite than later this yr. The inventory market resilience is essentially a mirrored image of a mixture of better-than-expected earnings and a restoration from decrease valuations reached after final yr’s selloff. It stays to be seen whether or not that optimism will probably be rewarded with continued features in inventory costs or renewed promoting on financial weak point. What does appear doubtless is elevated volatility within the coming months as buyers attempt to reassess the percentages of progress and weak point. Main shocks like a authorities shutdown or a major strike (UPS) can’t be dominated out, both.

Trying ahead, present valuations of shares and bonds stay considerably enticing even after the quarter’s sturdy efficiency. 5-year anticipated returns on investments have improved considerably for the reason that market peak in 2022. Despite the fact that shares have risen just lately, bond markets have priced in a reasonably important discount in rates of interest, signaling an expectation of a recession within the coming quarters. We might not be stunned by a drop in inventory costs on financial weak point, adopted by a robust restoration by the tip of 2024, although different eventualities are additionally attainable.

One factor that may be a bit disconcerting is simply how slender the inventory market has turn into, that means that the features we’re seeing within the indexes are actually powered by only a handful of massive (largely tech) corporations. This conduct is usually noticed late in a bull market.

Extra to the purpose, it’s almost inconceivable to time inventory market actions like we’ve described above. Traditionally, intervals when shopper sentiment concerning the financial system have been at its worst have been a number of the greatest occasions to purchase shares. Fairness costs are prone to be unstable this yr as buyers weigh the impression of a looming (or prevented) recession and negotiations in Washington round funding the federal government for 2024.

Our Portfolios

Our inventory publicity is at the moment broad based mostly and weighted in the direction of giant U.S. corporations. Our worth bias, which helped final yr as high-flying progress corporations struggled with rising rates of interest, has been a little bit of a detractor this yr as buyers have shrugged off excessive rates of interest and paid up for the shares of corporations which are displaying earnings progress. If a recession does happen, we’d count on this pattern to reverse once more and people increased P/E (costly) shares ought to fall more durable than the remainder of the market. Our worldwide publicity stays balanced between hedged and unhedged investments and advantages from extra enticing valuations than comparable U.S. equities.

As we speak’s increased rates of interest imply that anticipated bond returns going ahead are extra enticing than they have been a yr in the past. Extra importantly, if our expectation of a recession is realized, rates of interest will doubtless settle again down, offering good returns to bonds ought to shares falter heading right into a recession. Bonds must be a greater diversifier this yr, particularly if markets are right in forecasting decrease rates of interest heading into 2024. Even when that expectation is unrealized, longer-term rates of interest have risen fairly a bit already and are unlikely to rise considerably. And as we’ve identified, the upper present yields assist to offset the implications of additional will increase in long-term rates of interest.

In brief, we proceed to count on volatility as buyers put together for a attainable recession and alter their estimates for inventory costs accordingly. We’ll use such intervals of volatility to rebalance portfolios and choose up shares (or bonds) at discounted costs, to raised revenue from the restoration that has adopted each single market decline for so long as there have been markets.

As all the time, we’re right here for you and are prepared to offer the steerage and planning you count on from us. You probably have any questions on your investments or your monetary plan, we’d love the chance to debate them with you.

International Inventory Market Efficiency

The chart under reveals the change in international fairness markets all through the quarter. Juxtaposed over the market efficiency are a number of the key occasions that occurred throughout the interval. Generally as we get to the tip of a unstable interval, it’s troublesome to look again and bear in mind all the pieces that occurred alongside the way in which.

Q2 2023

Previous efficiency isn’t a sign of future returns. Info and opinions supplied herein replicate the views of the creator as of the publication date of this text. Such views and opinions are topic to alter at any level and with out discover. Among the data supplied herein was obtained from third-party sources believed to be dependable however such data isn’t assured to be correct.

The content material is being supplied for informational functions solely, and nothing inside is, or is meant to represent, funding, tax, or authorized recommendation or a suggestion to purchase or promote any forms of securities or investments. The creator has not thought of the funding goals, monetary scenario, or explicit wants of any particular person investor. Any forward-looking statements or forecasts are based mostly on assumptions solely, and precise outcomes are anticipated to range from any such statements or forecasts. No reliance must be positioned on any such statements or forecasts when making any funding resolution. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a tenet. No funding resolution must be made based mostly solely on any data supplied herein.

There’s a threat of loss from an funding in securities, together with the chance of complete lack of principal, which an investor will should be ready to bear. Various kinds of investments contain various levels of threat, and there could be no assurance that any particular funding will probably be worthwhile or appropriate for a specific investor’s monetary scenario or threat tolerance.

Blankinship & Foster is an funding adviser registered with the Securities & Alternate Fee (SEC). Nevertheless, such registration doesn’t indicate a sure degree of talent or coaching and no inference on the contrary must be made. Full details about our providers and charges is contained in our Type ADV Half 2A (Disclosure Brochure), a duplicate of which could be obtained at or by calling us at (858) 755-5166, or by visiting our web site at

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