The S&P 500 is up nearly 20% in 2023 as the “impossible” market rally continues. Making sense of the markets has proved difficult for even skilled investors thus far in the year as leading economic indicators remain weak. At Astoria, we believe that there is some room for constructiveness but continue to remind our clients that we are not out of the woods yet. We concede that the chances of avoiding a full-blown recession (a “hard landing”) in 2023 have materially increased but still foresee a correction coming.
Astoria’s call for a tactical summer rally driven by a broader value rotation is playing out. The markets’ performance has drawn investor sentiment to levels above historical averages. For instance, according to the AAII Investor Sentiment Survey, bullish sentiment reached its highest level in more than a year during the week ending July 5. Additionally, the labor market remains historically tight and continues to be one of the primary sources of strength for consumer spending. These positive indicators continue to point to a softer landing than some anticipated, and at the very least, the recession has been kicked down the road.
Recent economic data has seemingly been net positive for investors who are pulling for a “soft landing.” However, we continue to emphasize that we are far from out of the woods and recession fears should remain very much alive. Consumer health has been driving the economy since the pandemic, which is problematic as some indicators are beginning to show signs of deterioration. For instance, in the first week of July, Redbook Retail Sales declined Y/Y for the first time (excluding the immediate aftermath of the COVID-19 pandemic) since the Great Financial Crisis. Spending has also been bolstered by consumers’ excess savings generated from unsustainable or expiring government initiatives such as Medicaid and the student loan moratorium. At Astoria, we have maintained that the consumer “tapping out” or a rise in unemployment or jobless claims will be the catalyst for the economy to weaken.
The 2Y/10Y yield curve remains at historically large levels of inversion; the avoidance of a recession given this fact would be a statistical anomaly. The yield curve has been inverted for eleven straight months; in the seven times it has inverted since 1978, on average, a recession has followed sixteen months later. Global M2 money supply growth has also recently touched 50-year lows as the liquidity picture grows increasingly murky for investors.
To reiterate: we do believe that conditions and sentiment have improved tangibly but continue to contest that recession risks have not completely dissipated quite yet. We have been advocating for international equity markets for some time now and continue to do so, as we believe them to be behind the United States in the business and inflation cycle. ROW markets continue to be attractively priced. As always, we will preach Astoria’s True North: an allocation towards alternatives, a focus on high-quality, inflation hedges, and diversity across factors.
Best,
John Davi
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