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Windsor Perspective: Q3 2023

Windsor Perspective: Q3 2023

| July 10, 2023

Windsor Perspective: Q3 2023


How quickly time goes by, as we are already halfway through 2023. Summer has arrived and with it arrives new opportunities and challenges for investors. Will the summer’s rising temperatures correlate to rising market returns? Keep reading to learn more about our outlook.

In this edition of the Windsor Perspective, we review the market performance for June and for the second quarter of 2023. In addition, we discuss some of the key topics investors are focused on as we enter the back half of the year.

If you would like to talk to us further about these topics or about any of your financial planning or investment goals, please do not hesitate to get in touch with us.


Q2 2023 - What an encore!

The second quarter of 2023 was a nice encore to the first quarter. The market has now delivered three solidly positive quarters in a row. As a matter of fact, the one-year performance is now positive for many categories including the S&P 500, small cap stocks, international stocks, and fixed income. This is a strong recovery from what we experienced in 2022 and another reason staying invested is rewarding in the long run.

June delivered a very handsome 6.61% total return for the S&P 500 and a negative 0.58% return for the fixed income market (as measured by the U.S. Aggregate Bond Index). More importantly, for the second quarter of 2023 the S&P 500 delivered a strong total return of 8.74%. For the year to date, the S&P is now up a very healthy 16.89%. The fixed income market was down 0.38% for the second quarter, though remains up a 2.09% for the year. The fixed income market was impacted in May/June by higher interest rate fears as well as the debt ceiling negotiations.


S&P 500 Index Q2 of 2023

Source: Bloomberg, Windsor Wealth Management

Signs of slowing inflation, a resolution to the US debt ceiling negotiations, better than expected corporate earnings, a potential light at the end of the tunnel on interest rate increases, and good indicators of economic strength all played an important role in the performance of the second quarter. More importantly, consensus is coming to believe that if there is a recession, it will be shallow and short, and one the consumer and corporations will easily be able to handle. However, the strong performance year to date has not relieved all the lingering concerns investors have. In addition, we are entering the summer doldrums for the market, which could lead to muted performance in the near term.

Outlook for the remainder of 2023

As we enter the back half of 2023, the main concern on investors minds remains inflation and the Fed. In June, the Fed did what is being called a “hawkish pause”. Although they did not raise rates in June (the first pause since they began the rate increases), they did indicate at least two more rate increases this year. The good news is this implies we may be getting to the end of the rate increases, and it will become very data dependent. We think that is a good thing as not only does that give investors more visibility into where interest rates may peak, but we believe the inflation data should continue to slow allowing the Fed to permanently pause. As of now, the market is pricing in an 85% chance of a 25-basis point interest rate increase in July.

Looking at inflation, it appears that many of the leading inflation indicators point to rapidly slowing inflation. Shelter and used cars are two large components of CPI and have a significant impact on the reported CPI number we receive monthly. Looking at the latest data from the Realtor.Com rent report and the Case-Shiller home price index, the data shows rents/home prices are now declining or on the verge of declining. Think about that last statement – it is not inflation is slowing, but outright negative inflation. For example, the rent on a 2-bedroom apartment is now negative year over year while rents on a one-bedroom apartment are barely positive.


National Rent Trend by Unit Size (year over year)


In addition, data shows that used car prices are coming down fairly dramatically as well. The Manheim Used Vehicle Index is a measurement of wholesale used-vehicle prices. The latest data, from mid-June, shows used car prices in June were down 3.2% versus the month of May. More importantly, prices were down 9.4% in the first half of June (the latest reading we have) from the full month of June in 2022.


Manheim Used Vehicle Value Index
Mid-June 2023

Source: Manheim and Cox Automotive

Thus, used cars, rents and housing are all indicating much slower inflation ahead. However, the reported CPI lags the real-time data. Part of this reason is the CPI is designed to smooth out volatility, which inherently causes a natural lag. In addition, it takes time for some of the prices to actually make their way to the data (i.e. rental agreements typically renew annually, so not all renters benefit right away). According to an analysis by Fundstrat, market rents lead the CPI rents component by six months and market-based housing leads owners’ equivalent rent (the CPI version) by 17 months. According to Jeremy Schwartz of Wisdom Tree, after accounting for the real-time data, he calculates the shelter component of CPI is closer to 1.01% than the reported 8.03%. Likewise, his calculations show that headline CPI is closer to 1.5% using the real time shelter data vs the reported headline CPI of 4.13% which uses the government’s version of shelter.

This implies we should begin to see some steep drops in used cars, rents and housing in the coming months. Hopefully this data, along with other indicators of slowing inflation, will be enough for the Fed to permanently pause after two more rate hikes. A permanent pause would clearly be a positive catalyst for both the equity and fixed income markets. Below is a chart of the reported CPI as of the latest report in June. It is clear inflation is headed in the right direction.


Reported CPI year over year

Source: BLS, Windsor Wealth Management

Another topic investors continue to discuss is the potential for a recession. As we have mentioned several times in past notes, we believe there is a possibility we will experience a recession in the next 12 months, and that is in line with what most investors expect. We do not expect this to be a bad recession, rather it should be short and shallow – a rather muted recession. The main reason for this is that the economy has remained strong despite the rate increases. Specifically, employment has held up very well and homes have also held their value well. This should allow the economy to power through any temporary slowdown or recession. In addition to strong employment, the consumer is well positioned to handle a recession as their balance sheet remains strong. Consumer cash remains near all-time highs while homeowners’ equity in their homes also remains just off all-time highs.


The Consumer Has a Cash Cushion to Absorb a Recession

Source: Strategas

Finally, there is a new topic that investors are beginning to think about, though it is a few months off from coming to fruition. This topic is the high likelihood of a government shutdown beginning on or about October 1st. Although the debt deal was completed in May, the government must now approve twelve budgets for different agencies by that date, which is the beginning of the new fiscal year. The main issue around approving these budgets is the definition of spending limits agreed to in the debt ceiling resolution. Some believe expenses need to be cut to levels established in FY 2022 while others believe it sticks to levels agreed to in FY 2023. To achieve the lower spending levels of FY 20222 would require cutting over $100 billion from current spending levels, all while defense spending is increased. This would put pressure on the budgets for social welfare, health and education programs. A lot can happen between now and October 1st but talk of a government shutdown will begin to pick
up in Q3.


In Summary

Both Q1 and Q2 were very good quarters, and the first half of 2023 has been very good for investors. We believe we should continue to see gains through the end of 2023 as inflation continues to slow. Looking at historical patterns, since 1950 there have been 9 instances where the market was up more than 10% in the first six months of the year following a negative year. In 8 out of those 9 years, the second half of the year was up on average 12% for a full year average return of up 30%. Let’s hope history repeats itself.

As always, we will be seeking out opportunities for your overall financial plan based on the current economy and our outlook. Together, we will continue to tailor your plan to suit your unique financial objectives and a risk level you are comfortable with. Thank you for your confidence in our team and in Windsor Wealth Management.

Dream boldly. Plan wisely.