Market Perspectives: The Good, The Bad and The Ugly

Market Perspectives: The Good, The Bad and The Ugly

  • Following a tumultuous year for global markets, stocks have bounced back in 2023 posting solid returns through May. As the headline of this note suggests (as a reference to the 1966 film by the same name), there are positive elements of the current market environment and negative forces to monitor. 
  • On a positive note, the U.S. consumer has continued to spend, which has buoyed the economy. Inflation continues to cool and this may mean the Fed is close to the end of the current interest rate hike cycle.  Lastly, the job market while still resilient, may be slowly easing, suggesting that wage inflation may have peaked. Combined, these effects have provided a positive backdrop for markets. 
  • On the other hand, parts of the inflation picture remain cloudy. The Shelter Index, which accounts for approximately 35% of the Consumer Price Index, remains elevated and is a hurdle for inflation to continue to cool. The rate environment may begin to alter the trajectory of areas such as housing with mortgage rates lingering near 7%.
  • Lastly, the market has been led higher by a small group of mega-cap stocks with many stocks still in negative territory for the year. Additionally, while policymakers agreed to terms on the debt ceiling, current spending and rising debt levels appear unsustainable.

Berkshire Annual Meeting on 5/6/23

But, basically, we expect to make capital gains over time. Why would we own the stocks otherwise. It doesn't always work out. But, overall, it works out very well over time. But in any day, any quarter, any year, even occasionally over a five-year period, the stock prices move around capriciously.

Warren Buffet

The Good: Market Performance

On the heels of a difficult 2022, equity performance has been strong around the world year to date, with few exceptions.

Market Performance graphicSource: YCharts as of 5/31/23

The Good: Retail Sales Remain Solid

Despite inflationary challenges, a strong employment picture appears to be aiding ongoing consumer resiliency.  

Retail Sales Remain Solid graphic

The Good: Fed Rate Hikes Taking Affect

Inflation has slowed from the June 2022 high of 9.1% to 4.9% in April 2023 which can be partly attributed to the Fed aggressively hiking interest rates over the last 18 months. 

Fed Rate Hikes graphic

The Good: Rent Coming Down

While the CPI component of rent remains elevated, leading indicators in real time such as the Zillow Rent Index show a cooling off may lie ahead.

Rent Coming Down graphic

The Bad: Home Inventory

Housing inventory remains low, potentially providing support for elevated prices even in the face of higher mortgage rates. 

Graphic showing a decline in home inventory

The Bad: Mortgage Rates

Decade highs in mortgage rates are making it more costly for homeowners to finance purchases.

Graphic showing the decade high mortgage rates

The Ugly: The S&P 500 2023 Rally Has Been Narrowly Focused

The S&P 500 is up 10% in 2023 with the strong performance driven by an exceptionally small number of mega-cap companies. This rally, following a difficult year in 2022, may not be as robust as indicated by the returns of the S&P 500 market cap weighted returns. An equal-weighting of all other S&P 500 companies, not shown in the chart below, is negative for the year. 

Graphic showing the S and P 500 2023 Rally

The Ugly: Strong Jobs and Sticky Inflation

The employment picture remains strong, while inflation remains elevated, allowing the Fed to remain in restrictive territory in the near term. 

Graphic displaying jobs and inflation rates

The Ugly: Federal Debt Has Surged

The amount of total federal debt is approaching $31.7 trillion, approximately 37% higher than pre-COVID levels. 

Graphic showing federal debt

The Ugly: The U.S. Is Running Record Deficits

Concerns about the debt limit are, in part, borne out of persistently large annual deficits. Should current spending go unchecked, federal debt could continue to surge. 

Graphic showing the United States deficit

The Ugly: Debt to GDP Is Near Record Levels

Debt as a percentage of GDP is particularly useful as it measures the efficiency of debt and can be used as a comparison of debt levels over time. Looking back to the great depression, the current relative level of debt has been matched one other time, during the 1940s. 

Graphic showing debt to the GDP


As always, there are many factors for market participants to navigate. After nearly two years of generally lower global markets, at least a portion of the “bad” and the “ugly” appear to be well known. Inflation, for example, is talked about actively, even by the mainstream media. Our team remains focused on long-term investing and finding opportunities both in public and private markets. As suggested by the earlier Warren Buffett quote from the recent annual meeting of Berkshire Hathaway: “It doesn’t always work out…. But, overall, it works out very well over time.” Our philosophy remains to focus on the "over time" concept even as short-term conditions remain uncertain. 

Please reach out to your BDO advisor with any additional questions. 

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Opinions expressed in this commentary may change as conditions warrant and are for informational purposes only. Information contained herein is not intended to be personal investment advice for any specific person for any particular purpose. We utilize information sources that we believe to be reliable but cannot guarantee the accuracy of those sources. Past performance is no guarantee of future performance; investing involves risk and may result in loss of capital. No graph, chart, formula or other device can, in and of itself, be used to determine which securities to buy or sell, or when to buy or sell such securities, or can assist persons in making those decisions. Consider seeking advice from a professional before implementing any investing strategy.

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