North River Wealth - 2Q 2023 Market Update — North River Wealth Advisors

Resilient Market or Stormy Waters Ahead?

Amidst a backdrop of recessionary concerns, inflationary pressures, faltering banks, and debt ceiling issues, headlines suggested the second quarter appeared rather bleak. However, the market shrugged off these negative headlines and posted yet another robust quarter. This is exactly why a consistent investment approach remains crucial to long-term success.

Stocks Dominate

The S&P 500, representing large US company stocks, achieved an impressive return of nearly 9% for the quarter, adding to a cumulative increase of approximately 17% for the calendar year. Meanwhile, the Russell 2000, representing small US company stocks, recorded gains of 5% and 8% over the same periods. Across the globe, developed European and Asian markets rallied with gains of 3% for the quarter and 12% for the calendar year, while emerging markets stocks achieved moderate growth of around 1% and 5% during the same timeframes.

Growth Stocks

Upon diving deeper into market dynamics, it becomes clear that not all rallies within the stock market are created equal. Examining the S&P 500, most of the year's gains can be attributed to technology stocks. This included the exceptional performance of Nvidia, as well as other companies associated with artificial intelligence such as Meta (you mean Facebook?) and Apple. Notably, the tech-heavy Nasdaq soared over 32% this year, while the Dow Jones Industrial Average experienced an increase of approximately 5%. Although the appeal of individual stock pursuits can be tempting, maintaining a disciplined investment approach remains paramount.

Bond Market and Federal Reserve Developments

Mixed outcomes characterized the US bond market's performance during the quarter. Like the stock market, the environment favored risk-taking, resulting in gains for high-yield bonds, while the broader US bond market experienced a slight decline (yet still achieved an overall increase of over 2% for the year).

In a shift from the previous quarter, indications suggest that the Federal Reserve intends to proceed with additional interest rate hikes, potentially one or two by year-end, as part of its strategy to counter inflation. With the robustness of the US job market continuing, it appears that the Fed will persist with rate hikes until inflation is thoroughly tamed. However, the bulk of the rate increases is expected to lie in the past, affording greater stability to the bond markets. The higher yields resulting from these rate hikes make bond investments potentially more appealing than they have been in recent years.

The Outlook Ahead

Despite the strong start to the year, there are still several factors that warrant caution.

The Prospects of Artificial Intelligence (AI): It could be the next big thing, or it could be an overhyped technology that is quickly commoditized. We do believe AI will be a useful tool in streamlining productivity for many jobs, but the long-term benefits will take time to work through various sectors.

Expanding the Market Rally: For the market rally to gain momentum, it is imperative for sectors beyond technology and AI, such as banking, healthcare, and consumer staples, to rebound and contribute substantially to the overall market performance.

Bond Market Volatility: If you think trying to time the stock market is hard, try predicting the path of interest rates. Given the persistent inversion of the yield curve (shorter-term rates have higher yields than longer-term rates), many investors continue to perceive a significant risk of recession. The path ahead remains uncertain until inflationary pressures are mitigated.

Commercial Real Estate Conundrum: The struggle between corporate America and their employees on return-to-work policies will have far-reaching impact on what will happen to vacant offices across the country. In our hometown of Pittsburgh, many companies are starting to decrease their footprint downtown and move to other areas of the city. Employees still seem to have leverage for now, but if the job market cools, look for companies to continue to mandate employees to return to the office to justify their corporate real estate spend.

This past quarter strongly demonstrated the importance of discipline and diversification. Large gains could have been lost if you followed headline fears and didn’t stay invested. Portfolio returns may have been small or even negative without exposure to growth-oriented technology companies. Stay disciplined and diversified, and enjoy the summer!

Authored by Stephen Blahovec and Michael Rausch of North River Wealth Advisors. We are an independent, fee-only financial planning and investment management firm located in Pittsburgh, PA servicing clients locally and across the country. To learn more, contact us here.

This content is developed by North River Wealth Advisors from sources believed to be providing accurate information. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.