The stock market’s surprising first-half strength
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With the first half almost in the books, stocks are up nearly 15%.
Why it matters: The rally — which some argue is the early stage of a new bull market — reflects relief that inflation has eased without a recession, as well as a dash of AI hype for a bit of speculative spice.
By the numbers: With one trading day left in the second quarter...
- The S&P 500 is up 14.5%.
- The tech-heavy Nasdaq composite index is up 29.9%.
- The small-cap Russell 2000 — driven by expectations for the U.S. economy over the relatively short term — is up 6.8%.
Context: After an awful 2022 — the S&P's 19.4% fall was its worst since 2008 — investors were pretty darn bearish coming into this year. And for good reason...
- Inflation was still over 6%.
- More Fed rate hikes were expected.
- As a result, almost everybody was predicting a recession — and atrocious corporate profits.
- Oh, and there was the not-insignificant risk that the U.S. would default on its debts, setting off a financial crisis.
Yes, but: Things worked out OK. Inflation is now 4%, and the Fed took a breather on rate hikes. A debt ceiling deal got done, and the U.S. economy is a lot stronger than many expected. Corporate profits were fine.
- Even the worst banking panic since the financial crisis, which broke out in March with the failure of Silicon Valley Bank, didn't weigh on the market for long.
Be smart: There's an old aphorism on Wall Street that stocks like to climb a "wall of worry."
- Translation: Stocks tend to rise when investors start out as pessimists but grow gradually more confident when ugly scenarios they worried about don't come to pass.
- This is basically what's been happening in 2023.
What they're saying: "The 2023 trend is like other "wall of worry" bullish turns in 2020 (COVID-19), 2019 (US trade war with China), 2016 (Brexit vote and Trump elected President) and 2013 (Eurozone debt crisis)," wrote analysts of BofA Global Research this month.
What's next: Some think the continued rally hinges on whether the remaining bears can be gradually transformed into bulls.
- For their part, Goldman Sachs analysts say that the economic news — Thursday's better-than-expected GDP revision, for example — looks likely to keep coming in rosy.
The bottom line: "We think the macro news is still most likely to lead us to climb further up the 'Wall of Worry,'" they wrote in a recent client note.
