Thankfully, we have come to the end of a particularly contentious political season in which rival campaigns each suggested that the other side will hasten the end of the republic.  Today, the swing states will again decide the election outcome.  While most attention has been focused on Pennsylvania, other key swing states that matter include Arizona, Nevada, Wisconsin, Michigan, North Carolina, and Georgia.

We are only a few trading days into the month of August and already it feels like an entirely different environment compared to the one we have enjoyed for most of the year.  While economic reports have been flashing signs of inflation for many months, the equity markets have spent most of the year ascending to new record highs. 

Welcome to a new calendar quarter.  With the month of March coming to an end, the S&P 500 posted its fifth consecutive month of gains as corporate earnings remain resilient and the consumer continues to spend money.  The index is now higher by about 10% for the first quarter and a staggering 28% since the rally began in late October of last year.

Equity markets in the U.S. continue to press higher.  Less than a month ago, the S&P 500 crossed 5,000 for the first time in its history and since the low last October, the index has been up over 1,000 points.  Semiconductor manufacturer Nvidia reported a blowout fourth quarter earnings report and optimism over artificial intelligence keeps pushing stock indices to all-time highs.

As 2023 draws to a close, I am encouraged to observe that the year has turned out much better than many, including myself, had expected.  The economic slowdown, signaled by several traditional indicators such as the Leading Economic Index (LEI), has not yet materialized.  In fact, the third quarter growth in GDP far exceeded expectations and an increasing number of market strategists are shifting their perspectives to a “soft-landing scenario” in which the Federal Reserve’s aggressive and historic tightening cycle will succeed in reducing inflation without crushing the economy.

In late October both the Nasdaq and S&P 500 entered correction territory following a weak third quarter for equity prices.  The reasons behind falling stock prices have been higher interest rates and weak earnings guidance from corporate executives worried about the threat of an escalation to the war in the Middle East.  By the end of the month, the S&P 500 closed about 10% below its recent peak in late July. 

A couple of weeks ago Clearwater Capital released our full Mid-Year Update report of our Outlook 2023.  Even as the U.S. equity markets continue to rally, we remain cautious.  Our base case calls for a short and shallow recession to develop later this year, or early in 2024.