Portfolio Research Director, Kevin E. Donovan, CFA, and Senior Financial Adviser, Parker G. Trasborg, CFP®, discuss markets in the second quarter of 2023.

Kevin E. Donovan, CFA
Kevin E. Donovan, CFAPortfolio Research Director
Parker G. Trasborg, CFP®
Parker G. Trasborg, CFP®Senior Financial Adviser

Parker G. Trasborg:

Hi, I’m Parker Trasborg Senior Financial Adviser with CJM Wealth Advisers. And today again I’ve got Kevin Donovan, our Portfolio Research Director for our quarterly update of July 2023. Kevin, first quarter was great for markets all around. What did we see in the second quarter?

Kevin E. Donovan:

Well, if we’re looking at the S&P 500, I mean it’s pretty much a repeat of the first quarter. You might as well play back the video from that quarter. The good thing is we didn’t have any major negative issues come up or any crises like the banking crisis in the first quarter when the mid-tier banks, several of them failed. We didn’t have anything like that in the second quarter. But in the second quarter for technology stocks, they had another leg up because artificial intelligence really boosted up some of the companies, the larger companies in the sector, and that really helps out the S&P 500. So once again, the tech sector led the S&P 500 to a wide performance gap over the other indexes. And we can see that if we look at the first chart here, which is the first quarter performance chart for the major indexes.

So you can see right at the top in dark blue is the S&P 500, and that was up just over 8%. And then well below that, the Dow Jones Industrial Average in orange and the International Index in light blue, they stayed pretty much right around zero until June when they finally started to turn positive and they had a really good last week of the quarter. So the Dow finished up about three and a half, and international stocks almost 2%. So still well below the S&P 500, but a positive performance for the quarter.

Parker G. Trasborg:

Great. And what happened with bonds?

Kevin E. Donovan:

Yeah, bonds also hovered around 0% until June, but they turned negative towards the end of the quarter and the Fed announced that it would pause its interest rate hikes in June. But they said very strongly that they were going to go back to hiking interest rates later on in the year. So at least two more times. And I think leading up to that point, the market maybe had doubted the Fed’s resolve in continuing their interest rate hikes. And a lot of bets were made that the Fed eventually had to cut interest rates because economy would slow down too much, that the very aggressive interest rate hike cycle would slow the economy down. But the economy has shown to be surprisingly resilient so far, and now the market’s starting to believe that the Fed may have to raise interest rates and that has a negative effect on bond prices.

If we switch over to the year to date chart, you can see it’s a similar story. S&P has a big lead. It’s up almost 16% in the first half of the year. That’s really good Performance numbers. International is up about 10%, so pretty good performance there. They had a very strong first quarter that they built on, and the Dow was up just 3.8% while bonds are up 2%. So why is this a big discrepancy between the S&P 500 and the Dow? Well, the technology stocks which we talked about is one major reason, but the stock market is divided up into 11 industry sectors, and four of those sectors are negative year to date still, even with these performance numbers that are positive for the overall indexes. So utilities, energy, healthcare, financial sectors, they’re all negative year to date while the technology sector is up 43% year to date.

So you have these sectors that are weighing down the Dow that are very heavily weighted in the Dow that are keeping it down while the ones that the S&P is overweighted in the technology sector is really lifting it up. So that’s why we’re seeing that big difference in between the Dow performance and the S&P 500 performance. For bonds, 2% gain so far this year, the yield on the 10 Year Treasury Note is right around where we started the year at 3.8%. At the end of the second quarter, it’s a little higher than it was at the beginning of the second quarter, which is why bonds were negative in the second quarter, but still are doing somewhat decently with a 2% gain year to date.

Parker G. Trasborg:

Does that include the interest that we’re clipping off the bonds Kevin, or is that just price appreciation there?

Kevin E. Donovan:

No, that’s total return so far. So it includes the interest and with bond funds paying four to 6% roughly with the 2% gain halfway through the year, you kind of figure that at least you would get the coupon return or the yield return year to date. We’ll see about price appreciation as the year goes on and if the Fed… the economy starts to suffer a little bit and yields start to come down, you may see some additional bond performance, but at least you’re getting that income that you didn’t get prior to this year.

Parker G. Trasborg:

Great. Great. Well, thank you, Kevin. Economy continues to hum along. Hopefully the markets will continue to hum along through the end of the year as well. Definitely a pleasant surprise from what we saw last year through to this year. Thank you all for joining us again today. If you have any specific questions, feel free to reach out to your planner directly and we are happy to get those answered for you and we will see you next time. Bye-bye.

Kevin E. Donovan:

Bye.