Mitch Zacks: Stocks Rallied in First Half of the Year—Should We be Surprised?

Mitch argues that the strong performance of stocks can at least partly be credited to 'better than expected' outcomes to issues that had investors worried. [Mitch on the Markets] Stocks Post “Surprising” Rally in the First Half of 2023 Stocks started 2023 with a 4th of July-like bang, with the S&P 500 rallying nearly +17% in the first six months. The tech-heavy Nasdaq posted its strongest start to a year since 1983, with a stout +32% return. Small-cap stock (Russell 2000) performance was comparatively weaker, but still strong on a stand-alone basis with a 7.9% jump.1 Strong equity performance in the first half took many market prognosticators by surprise, especially those who strongly believed the U.S. economy was charging toward a significant recession. Of course, that recession never arrived. The U.S. Commerce Department released data last week showing the U.S. economy grew at a 2% annualized pace in the first quarter, which is substantially higher than the previous 1.3% estimate. The unemployment rate has barely nudged in the first half of the year, and the labor market continues to add jobs at a rapid clip. Consumer spending remains solid. --------------------------------------------------------------- [Are Your Investments Prepared for a Potential Recession?]( The economy has shown some progress in the first half of the year, but many investors still question the events ahead. When is the anticipated recession going to hit? No one truly knows, but I recommend keeping your investments protected from any market downturn. To help, I’m offering our just-released July Stock Market Outlook Report. This report will give you access to our forecasts for the months ahead and insight into where to invest. - Zacks view on equity markets - Setting U.S. returns expectations for 2023 - Zacks Rank S&P500 sector picks - What’s alive for 2023 pessimists - And more… If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [Download Our Just-Released July 2023 Stock Market Outlook Report 2]( --------------------------------------------------------------- Economic resilience and strong market performance befuddle many, but it probably shouldn’t. Any time you see investors and financial media’s worst-case scenarios fail to materialize – with the economy performing a little or a lot better than most expect – the stock market generally performs well. As I’ve written time and again, positive performance in markets is often about reality versus expectations, and whether the economy did better or worse than expected. In the first half of 2023, “better than expected” was a recurring theme: Feared Outcome Actual Outcome Regional Bank Contagion / Financial Crisis Fed intervenes with the emergency lending facility, depositors made whole; JP Morgan intervenes to buy First Republic; banking system remains stable. U.S. Debt Default / Credit Downgrade Congress and the White House reached a deal to extend the debt limit through January 2025. Housing Collapse Housing prices fall, but not precipitously; demand for new homes remains stable. U.S. Economic Downturn / Recession The U.S. economy grew and added jobs in the first half of 2023. It’s easy to surmise, using the above table, that the worst-feared economic outcomes simply did not come to fruition. And simply put, that’s what historically leads to market rallies. Naysayers will cite the lack of breadth in the equity market’s strong first half, pointing to the disproportionate contribution of mega-cap technology stocks to the index’s overall performance. Enthusiasm for artificial intelligence (A.I.) led to a surge in interest in the biggest tech companies, the absence of which would have meant more muted returns for the market. After all, the top 5 companies in the S&P 500 account for 24.1% of the entire index. These are fair points, but I think this narrative obscures what ultimately became a broader rally late in the second quarter. For Q2, the Russell 2000 (small-cap stocks) rose +5.2%, the S&P/Citigroup Value index was up +6.6%, the S&P 400 index (mid-cap stocks) was up 4.9%, and Consumer Discretionary was another large-cap sector that performed well, +14.6%. None of these indexes or sectors include mega-cap technology names. It's also true that fixed income categories held their own in the first half, with everything from Treasurys to junk bonds posting modestly positive gains. Many investors felt so negatively about the U.S. economy in the first half of the year that positive returns result in even more doubt. There must be a “major disconnect” happening, the thinking goes. But I would argue that the disconnect is in understanding how equity markets work. Bottom Line for Investors Many disbelievers in the current market strength have simply pushed out their timelines for recession and market turmoil. But we already know that this mindset has been costly over the last 8+ months, as the market has bounced well over +20% from bear market lows. Is it possible that the U.S. economy enters a recession sometime in the next few quarters, and that it’s worse than expected? Surely. But signs right now point to any downturn being close to in line with broad expectations, which at Zacks we’ve been referring to as more a ‘garden variety’ type of economic downturn. As long as a recession isn’t worse than expected, then I don’t see a strong case for being out of stocks. IIn the meantime, keeping an eye on key data points and fundamentals can help your investments when the market takes a turn. To help you do this, I recommend reading our [Just-Released July 2023 Stock Market Outlook Report](. This report will give you deeper insight into the following: - Zacks view on equity markets - Setting U.S. returns expectations for 2023 - Zacks Rank S&P500 sector picks - What’s alive for 2023 pessimists - And more… If you have $500,000 or more to invest and want to learn more about these forecasts, click on the link below to get your free report today! [Download our Just-Released July 2023 Stock Market Outlook 3]( About Zacks Investment Management Zacks Investment Management was born out of one of the country’s largest providers of independent research, Zacks Investment Research. Our independent research capabilities from our parent company truly distinguish us from other wealth management firms - our strategies are derived from research and innovation, including the proprietary Zacks Rank stock selection model, earnings surprise and estimate revision factors. At Zacks Investment Management, we work with clients with $500,000 or more to invest, and we use this independent research, 35+ years of investment management experience, and tools we’ve developed to design customized investment portfolios based on each client’s individual needs. The end result is investment management that is research driven, results oriented and client focused. Don't put off planning your secure retirement! Talk to a Zacks Wealth Advisor today. [Schedule Your Chat]( [facebook]( [linkedin]( [twitter]( © Zacks Investment Management | [Privacy Policy]( 1[Wall Street Journal. June 30, 2023.]( 2 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. 3 Zacks Investment Management reserves the right to amend the terms or rescind the free-Stock Market Outlook Report offer at any time and for any reason at its discretion. 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