The market is on a notable upswing, with the MAG 7 stocks (TSLA, AAPL, AMZN, GOOG, MSFT, META, NVDA) leading. The ETF that focuses on these top stocks has seen an impressive 23.77% increase this year and a remarkable 34.52% increase over the past 12 months. In contrast, the equal-weighted S&P (RSP) has experienced a modest 5.10% increase this year and a 10.49% increase over the past 12 months.

Last year saw equity markets climb a wall of worry as most major equity indexes saw double-digit growth despite the majority of pundits calling for a recession during the year. Our models started getting bullish in October 2022 and remained that way for much of 2023. After the robust rally we saw in the fourth quarter, our sentiment models indicate that market participants may be overly optimistic.

Interest rates are rising, and decreasing liquidity in the markets continues to put pressure on the economy. However, the recent market pullback and low current investor equity exposure are presenting the opportunity for a rally in the fourth quarter.

After a brief pause, the Fed raised rates by another 25 bps in its latest policy announcement. The current level of Fed funds (5.25%-5.50%) has not been seen in 20+ years. The economic impact is yet to be felt fully, but we are already seeing signs that liquidity is shifting from being a tailwind to a headwind.

The Fed raised rates by another 25 bps in their policy announcement last week, which the market mostly took in stride as the increase was expected. (Yes, that is the same opening sentence from our last Market Update written in March.) Growth stocks outperforming Value stocks has been a major theme year-to-date.

The Fed raised rates by another 25 bps in their policy announcement last week, which the market mostly took in stride as the increase was expected. Interestingly enough, the market has been essentially flat since the news broke of the Silicon Valley Bank troubles and was positive last week, even with the Fed’s announcement and Treasury Secretary Yellen’s comments on backing all bank deposits with the FDIC program.

After one of the worst years on record for both equity and fixed-income markets, 2023 is off to a good start with most equity and fixed-income indexes positive for the year so far.

All eyes remain on the Fed as they appear to be nearing a slowdown on the magnitude of rate hikes in the coming months. After the latest CPI print, the market is pricing in a roughly 80% probability of a 50bps hike in December followed by a 50/50 chance of a 50bps or 25bps hike in February.