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July 29, 2023 Market Update

The U.S. central bank raised interest rates by 1/4 percentage points last week, to a range of 5.25% to 5.5%, a 22-year high.  It was the 11th rate increase since the Fed began its inflation fight in March 2022, and comes just one month after the central bank hit the pause button on rate hikes.  

Stocks finished the week higher, boosted by expectations that the Federal Reserve has finished raising rates for this cycle.  Friday’s release of the Personal Consumption Expenditures (PCE) Price Index for June added credence for that outlook.  The consumer inflation gauge showed prices rose 0.2% in June, and 3.0% over the prior 12 months – the latest signs that inflation continues to ease. 

The Commerce Department announced on Thursday that America’s gross domestic product grew at a seasonally and inflation adjusted annual rate of 2.4% in this year’s second quarter, picking up slightly from the 2% growth in the first three months of the year.  The report is one of several that has shown the U.S. economy has been surprisingly resilient despite the rise in interest rates.

At the start of the year, there was no shortage of Wall Street prognosticators who confidently predicted that the U.S. was on the verge of a severe recession, and that the stock market would suffer as a result.  With 2023 now past the half-way mark, many of these pundits are dialing back their earlier forecasts.

For instance, Mike Wilson, Morgan Stanley’s chief U.S. equity strategist, conceded last Monday that he was wrong when he predicted the S&P would finish 2023 around 3,900.  However, his latest forecast remains pessimistic.  He is now calling for the S&P to finish the year at 4,200, which would be a decline of roughly 8% from Friday’s closing price.

Mr. Wilson is hardly alone when it comes to walking-back earlier forecasts for 2023.  For instance, the consensus view of economists polled by The Wall Street Journal put the probability of a recession in the next 12 months at 54%, which is down from 61% in the prior two surveys.  While that probability is still high by historical standards, it represents the largest month-over-month percentage-point drop since August 2020.

In short, 2023 is once again revealing the danger of putting too much faith in short-term forecasts.  Perhaps Warren Buffet said it best when he wrote: “A prediction about the direction of the stock market tells you nothing about where stocks are headed, but a whole lot about the person doing the predicting.”  

That’s all for now.  Have a great weekend, and invest wisely my friends.