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Markets’ Monster 2023 Rally Defied All Expectations


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Any number of things could have derailed markets in the first half of the year. Investors kept buying risky assets anyway.

Stocks burst out of a bear market, with the Nasdaq Composite up 30% and on course for its best first half of a year since the 1980s. Bitcoin surged more than 80%, despite the U.S. Securities and Exchange Commission suing the world’s biggest cryptocurrency exchanges. Bonds enjoyed some reprieve, too. Indexes tracking everything from Treasurys to junk bonds have posted modest gains following their historic selloff last year.

Why did markets keep rising, despite a banking crisis, the threat of a U.S. default and more interest-rate increases from the Federal Reserve? The simplest answer: Time and time again, investors’ worst-case scenarios failed to materialize.

Quick action from regulators and bankers in March helped prevent the collapse of Silicon Valley Bank from morphing into a systemic credit crunch. Lawmakers managed to strike an agreement on government spending in late May, just in time to avert what would have been an unprecedented U.S. default on debt. 

Perhaps most important, the recession that so many economists anticipated would strike has so far remained out of sight, giving investors hope that markets might be able to keep climbing.

The Fed has continued to raise interest rates in an effort to rein in inflation. Ordinarily, higher rates, which translate into higher borrowing costs for consumers and companies, should help cool the economy. And they have, a bit: Sales of existing homes have fallen by about a third since the start of 2022.

But the Fed’s rate increases haven’t ended the economic expansion, either. Commerce Department data on Wednesday showed gross domestic product increased at a 2% annualized pace in the first quarter, significantly faster than the previous estimate of 1.3%. The labor market has continued to add jobs at a pace well above its prepandemic average.

Ultimately, those who stayed out of the markets this year in fear of another selloff missed out on robust gains. The S&P 500 is up nearly 15% this year. The Dow Jones Industrial Average has climbed 2.9%.

“All these people in the industry are always trying to guess what the next blowup is going to be,” said

Stacie Mintz,

head of the quantitative equity team at PGIM Quantitative Solutions. If this year has shown anything, she said, it is that it is difficult to predict which headline-grabbing events wind up having a lasting impact on market returns. 

That makes the outlook for the rest of the year somewhat murky, too. 

“There are still so many question marks: when the [Fed’s] rate hikes are going to end, when we go into recession, and how deep that recession is going to be,” Mintz said.

Some money managers are still questioning whether the market’s gains are here to stay. Fund managers surveyed by
Bank of America
still have less exposure to stocks in their portfolios than usual, according to a report released in mid-June. And a measure of sentiment among those investors has stayed relatively low, too.

Why the skepticism?

One thorn in investors’ sides has been the fact that the market’s gains have been relatively narrow. Although other parts of the market have gained ground in the past month, many of the best-performing stocks this year remain megacap technology companies that investors think will be at the forefront of artificial intelligence. Without the outsize gains of those stocks, the market’s returns would be greatly diminished.

“What’s challenging is figuring out the winners and losers,” said

Tom Ognar,
senior portfolio manager at Allspring Global Investments. “I think that’s a lot more complicated and still going to be fought out, so you don’t want to overcommit from an investor standpoint.” 

It is difficult to ignore, too, that while economic data have largely been better than expected, some cracks have begun to emerge.

From the start of the year through May, 286 U.S. companies filed for bankruptcy protection, including Silicon Valley Bank,
Bed Bath & Beyond

and Vice Media, according to S&P Global Market Intelligence. That is the highest number for the first five months of the year since 2010. 


What is your market outlook for the second half of this year? Join the conversation below.

Data on the manufacturing sector has been deteriorating for months. And jobless claims, considered a proxy for layoffs, at one point this year rose to their highest level since 2021. Although on Thursday, initial claims for unemployment benefits unexpectedly dropped.

Investors and analysts widely agree that the economy is slowing. They also agree that historically, recessions have been bad news for markets. 

They just can’t agree when the much-anticipated downturn, if it materializes, will begin to weigh down markets. 

“It’s best not to get too cute about timing it,” said

William Sterling,
global strategist at investment firm GW&K. “This year has been a lesson about not getting overly pessimistic.”

Write to Akane Otani at

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