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Stembrook Market Review - Second Quarter 2023 Thumbnail

Stembrook Market Review - Second Quarter 2023

Market Updates

Despite concerns of a slowing economy and stubborn inflation, the broad U.S. stock market had a strong first half of the year. This outsized performance was primarily concentrated within a few large companies. On a market cap weighted basis, large cap stocks in the U.S. are up nearly 17%1 year-to-date, but if you study the equal weighted index of the S&P 500, the group is up only 7%.This strong performance has been carried by a small group of tech related stocks, recently coined the "Magnificent Seven." The top 10 contributors of the S&P 500, account for 82% of the performance in the index this year. In a typical year, the top 10 contributors account for approximately 32% of the overall index return.3 These stocks trailed quite a bit in 2022, but have staged a comeback in the first half of the year and have carried the overall index performance. In addition, the price to earnings (PE) ratio of the top 10 stocks is 45% higher than the average for this group, while the remaining stocks are still above their average levels, 13% above average.4 Globally, stocks are up 13.9% since the beginning of the year.5

Despite strong market returns, consumer sentiment remains well below its long-term average of 85 at 64.4. This is up from the low of below 50 in June 2022.6 Numerous economists have predicted a recession over the course of the last 18 months, but the NBER has yet to declare a recession in the US and, in aggregate, the economic data across the U.S. remains strong. The labor market, despite showing some signs of weakness lately, remains robust. In addition, consumer spending remains robust, but is expected to cool as pandemic era spending levels continue to fade. However, the yield curve remains inverted, which has historically been an indicator of a coming recession and surveys have indicated that capital spending from businesses will continue to drop in coming months. We do not claim to know when the next recession will be, but it is important to recognize that markets, especially over the short to medium term, do not necessarily correlate with the overall economy. Therefore, it is important to remain focused on fundamentals in both equity and fixed income markets.

Magnificent Seven Performance

Seven mega cap stocks have driven performance in the U.S. stock market in the first half of 2023.

Our proprietary models forecast long-term, pre-tax returns ranging from 3% to 5% for fixed income-like asset classes and 9% to 11% for equity-like asset classes (see Expected Market Returns and Risks table). We maintain target weight allocations to equities and fixed income. Our more detailed observations and current portfolio positioning are outlined in the following comments. 

Expected Market Returns and Risks 7-10 Year Horizon

A sampling of return expectations produced by our models. Expected returns are projections and are not guaranteed.  

Historical Market Returns

Historical market returns as of June 30th, 2023. Note that looking backwards at recent returns is not a reliable method of predicting future returns. 

Yields Across Asset Classes

Yields are an indicator of future returns. Orange dots show current yields, blue bars show historical ranges.

 Economic Backdrop

  • In their latest April release, the IMF projected that global economies would grow at a 2.8% annualized pace in 2023, adjusted for inflation. This comes off 3.4% growth in 2022. Economic growth is expected to bounce back slightly in 2024 to a 3% level.7
  • Emerging economies are not immune to slower global growth. The IMF expects these economies to growth by 3.9% in 2023, down slightly from 4% growth in 2022. Economic growth in India is expected to remain robust at a 5.9% annualized pace this year, continuing a pattern of more robust growth than China.7
  • Inflation remains sticky on a global level, but is beginning to show signs of retreating. The IMF expects inflation to remain elevated at 7% in 2023 and drop to 4.9% in 2024.7 
  • Inflation in the U.S. has begun to to cool. The year-over-year change in inflation dropped to 3% at the end of the most recent quarter from 5% at the end of March.8 
  • Per their most recent release, the Federal Reserve is committed to keeping inflation low and announced that they will keep the target federal funds rate of 5-5.25% in order to get back to their 2% inflation target in which they are "strongly committed."
  • Despite most economic data remaining stable, the New York Fed predicts a 71% chance of recession within the next 12 months, which is slightly more optimistic than last quarter's prediction. 


  • The U.S. Dollar appreciated modestly in the second quarter, up 0.4%.9


  • Across the board, stocks did very well in the second quarter. As mentioned earlier, growth-oriented technology stocks led the way, with the NASDAQ up 15.4%.10
  • Small cap stocks in the U.S. trailed large cap equities, up 2% in the quarter.11 
  • Non-U.S. stocks trailed but still had positive returns for the quarter. Developed Non-U.S. stocks were up 3.0% in the quarter.12
  • As the Chinese economy continued to cool and concerns over U.S China trade relations were rekindled, Emerging Markets equities trailed other global stocks, but still had a positive return, up 0.9% in the quarter.13

Fixed Income

  • After a slight recovery in the first quarter, bond prices slid again the second quarter due to concerns over higher interest rates for a longer period of time as indicated by the Federal Reserve chair. Investment grade bonds were down -0.8% in the second quarter.14
  • High yield bonds continued to deliver positive returns in the second quarter, up 1.8%.15
  • Municipal bond performance was similar to investment grade performance in the second quarter, down -0.7%.16

Global Asset Class Returns

Returns are arranged in columns, by year. Each color represents a different asset class. Each year, the leaders and laggards tend to shift. Diversification across a range of asset classes can smooth returns and enhance growth.

Current Positioning

  • Out of an abundance of caution, we shifted our cash in traded money market funds from a prime fund, which holds a combination of commercial paper, repurchase agreements, CDs and Treasuries to one that holds Treasuries, backed by the full faith and credit of the U.S. government. We sacrificed very little in yield by making this transition. 
  • We have sold our inflation-linked bond positions for taxable and tax-deferred investors as the yields have become less attractive than nominal treasuries on a relative basis.
  • We maintain our neutral duration position in the fixed income portfolio as interest rates have risen to levels that are closer to historical averages.
  • We maintain our overweight to developed non-U.S. and emerging market equities, where valuations and long-term return potential remain attractive. 
  • We also maintain our underweight to large cap U.S. equities. 
  • We favor lower priced, value-oriented equities, both in the U.S. and abroad, which tend to outperform the broad market over time, with less volatility. These investments outperformed in 2022. A number of our international and emerging markets managers outperformed their specific benchmarks by wide gaps in 2022 and are enthusiastic about their current positioning.

We continue to focus our efforts on helping you meet your financial objectives by following our disciplined investment approach. Our approach uses return and risk models, incorporating fundamental valuations and tax-efficient strategies. This investment discipline is tailored to your individual situation in our continuing effort to craft and implement your customized investment solution. 

As always, we thank you for placing your trust in our investment management and advice and welcome your questions and comments at any time.

Peter & Tom


Endnotes and Sources:


  1. Morningstar: S&P 500 Total Return. 12/31/22-6/30/23.
  2. Morningstar: S&P 500 Equal Weight Total Return. 12/31/22-6/30/23.
  3. Goldman Sachs Investment Research, FactSet.
  4. JP Morgan Asset Management. As of 6/30/23.
  5. Morningstar: MSCI ACWI All Cap NR USD. 12/31/22-6/30/23.
  6. University of Michigan Consumer Sentiment Index. As of 6/30/23.
  7. IMF World Economic Outlook: April 2023.
  8.  Bureau of Labor Statistics: CPI For All Urban Consumers. 6/30/23.
  9. Barchart: $DXY—U.S. Dollar Index. 3/31/23-6/30/23.
  10. Morningstar: NASDAQ 100 Total Return. 3/31/23-6/30/23.
  11. Morningstar: S&P 600 Total Return. 3/31/23-6/30/23.
  12. Morningstar: MSCIE EAFE NR USD. 3/31/23-6/30/23.
  13. Morningstar: MSCI EM NR USD. 3/31/23-6/30/23.
  14. Morningstar: Bloomberg US Aggregate TR USD. 3/31/23-6/30/23.
  15. Morningstar: Bloomberg US Corporate High Yield TR USD. 3/31/23-6/30/23.
  16. Morningstar: Bloomberg Municipal 5 Year Total Return. 3/31/23-6/30/23.


Magnificent 7 Performance: As of 6/30/23. 

Source: Federal Reserve, Stembrook Research. 

Expected Market Returns and Risks, 7-10 Year Horizon: As of 6/30/23.

Source: Stembrook Research.

(1)  Volatility is measured in terms of Standard Deviation. Standard deviation is the statistical measurement of dispersion about an average, which depicts how widely a stock or portfolio’s returns varied over a certain period of time. Investors use the standard deviation of historical performance to try to predict the range of returns that is most likely for a given investment. When an investment has a high standard deviation, the predicted range of performance is wide, implying greater volatility. If an investment’s returns follow a normal distribution, then approximately 68 percent of the time they will fall within one standard deviation of the mean return of the investment, and 95 percent of the time within two standard deviations. For example, for a portfolio with a mean annual return of 10 percent and a standard deviation of two percent, you would expect the return to be between 8 and 12 percent about 68 percent of the time, and between 6 and 14 percent about 95 percent of the time. Source: Morningstar.

Historical Market Returns: As 6/30/23.

Source: Morningstar, Stembrook Research.

Indices: Bloomberg Barclays U.S Treasury Bills 1-3 Month Total Return, Bloomberg Barclays Municipal Bond 5 Year (4-6) Total Return, Bloomberg Barclays U.S. Aggregate Bond Total Return, Bloomberg Barclays U.S. Corporate High Yield Total Return, FTSE All Equity REIT Total Return, S&P 500 Composite Total Return, S&P SmallCap 600 Total Return, MSCI EAFE Total Return, MSCI EM (Emerging Markets) Total Return, Consumer Price Index – U.S., S&P 10 Year U.S. TIPS Total Return, Bloomberg Commodity (Total Return) Index.

Yields Across Asset Classes: As of 6/30/23.

Sources: Cash Equivalents Yields since March 1976. Ibbotson, Federal Reserve Bank, Thomson Reuters, Municipal Bond Yields since March 1988. Barclays Capital, Charles Schwab, BofA Merrill Lynch, Standard & Poor's/Investortools Municipal Bond Indices, Investment Grade Bond Yields since March 1976. Barclays Capital, High Yield since December 1984. BofA Merrill Lynch, Barclays Capital, Real Estate (Public) Earnings Yield since March 1976. NAREIT all Equity, Large Cap U.S. Equity Earnings Yield since March 1976. Standard & Poor's, BARRA, Mid Cap U.S. Equity Earnings Yield since June 1991. Standard & Poor's, BARRA, Small Cap U.S. Equity Earnings Yield since December 1993. Standard & Poor’s, BARRA, Developed Europe Equity Earnings Yield since March 1976. MSCI Europe, Standard & Poor's Europe 350, Developed Pacific Equity Earnings Yield since March 1976. MSCI Pacific, S&P/Citi PMI Asia Pacific, S&P Asia 50, Emerging Market Equity Earnings Yield since December 1998, Inflation-Linked Bond Real Yield to Maturity since March 1997. Citi Yield Book, Federal Reserve Bank. Note: Yields are not perfect predictors of future returns and should not be used in isolation.

Global Asset Class Returns: As of 12/31/22.

Source: Thomson Reuters, Bloomberg, Morningstar, Stembrook Research.

Indices: Consumer Price Index – US, U.S. 30-Day Treasury Bills, Bloomberg Barclays U.S. Treasury Bills: 1-3 Month Index, Citigroup Inflation-Linked Index, S&P 10 Year US TIPS Index, Bloomberg Barclays U.S. Aggregate Bond Index, BofA Merrill Lynch U.S. High Yield Cash Pay, Bloomberg Barclays U.S. Corporate High Yield Index, Dow Jones Wilshire REIT Index, FTSE All Equity REIT Index, S&P 500 Composite Total Return, S&P SmallCap 600 Total Return, MSCI EAFE Index, MSCI EM (Emerging Markets) Index, Dow Jones AIG Commodity (Totl Ret) Index, Bloomberg Commodity Index.


This material is intended to inform you of products and services offered by Stembrook Asset Management, LLC (“Stembrook”). Stembrook is a New Jersey Registered Investment Advisor.

This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. The opinions, estimates, and investment strategies and views expressed in this document constitute the judgment of Stembrook, based on current market conditions and are subject to change without notice. The investment strategies stated here may differ from those expressed for other purposes or in other context.

 Past performance is not indicative of future results.

The obligations and securities sold, offered, or recommended are not deposits and are not insured by the FDIC, the Federal Reserve Bank, or any governmental agency.

The views and strategies described herein may not be suitable for all investors. This material is presented with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax adviser concerning such matters. 

Important note regarding Stembrook’s capital market expectations.

The capital market expectations developed by Stembrook Asset Management are estimates of both a central tendency of asset class behavior and a probable range of asset class behavior over a long-term horizon. These estimates are one of many inputs used in the portfolio construction process, and should not be used independently. These expectations should not be construed as the returns that will be achieved, but merely those that may be achieved if certain assumptions hold true. Also note that each client's portfolio may differ given specific goals and constraints applied to the portfolio construction process. 

Additional information is available upon request.