Prepare yourself for a possible all-time S&P 500 high*, global manufacturing rebound and U.S. election static.
The market’s obsession with a potential recession that defined the first half of 2023 has given way to an almost eerie calm as the height of summer nears.
March’s banking crisis and May’s debt ceiling debate passed like squalls but seem to have done relatively little damage to the economy as a whole. Indeed, market performance in the first half of 2023 was strong—surprising many. A portfolio of 60% stocks and 40% bonds has an almost 9% to 12% return so far this year.1
Question is: What’s in store for the economy and markets during the second half of this year?
Our Mid-Year Outlook (along with the Global Investment Strategy view) go through what we think is most likely. But beyond our base case, we foresee three scenarios that should not surprise if they materialize:
- The S&P 500 could well reach a new all-time high.
- Global manufacturing has the potential to rebound.
- The upcoming U.S. presidential election will be a central focus over the next year.
You can prepare for these possibilities by reviewing your exposure to equities and cyclically sensitive sectors, such as small- and mid-caps and emerging markets; and prioritizing your long-term investment plan over election noise.
1. Is a new all-time high for the S&P 500 on the horizon?
Investors who sought safety and yield in Treasury bills and money market funds this year missed the equity rally in the first half of 2023. But history suggests it isn’t too late to get invested and potentially profit. New all-time market highs before the end of this year shouldn’t be relied upon—but shouldn’t come as a surprise either.
After the 15% rally in the first half of 2023, the index is less than 10% away from a new record. The path to a new all-time high for the S&P 500 is probably more realistic than most think.
The historical precedent for such market buoyancy is clear: A strong first half of the year typically begets a strong second half. Since 1950, when the S&P 500 has been up over 10% in the first half of the year, the median gain for the index in the second half of the year has been another 10%.2 Second-half returns after a strong first half have been even better when the prior year was negative. Past performance is not indicative of future returns, but new all-time highs by the end of the year would likely be consistent with history.
If the first half of a year is strong, markets tend to do well in the second half
The chart describes 30 years of S&P 500 returns after the benchmark index climbed at least 10% through June. The left side describes the gains through first half of the year 1954: 18% 1955: 14% 1958: 13% 1961: 11% 1967: 13% 1975: 39% 1976: 15% 1983: 20% 1985: 15% 1986: 19% 1987: 26% 1988: 10% 1989: 14% 1991: 12% 1995: 19% 1997: 19% 1998: 17% 1999: 12% 2003: 11% 2019: 17% 2021: 14% Median: 15% The right side describes the performance six months later. 1954: 23% 1955: 11% 1958: 22% 1961: 11% 1967: 6% 1975: -5% 1976: 3% 1983: -2% 1985: 10% 1986: -3% 1987: -19% 1988: 2% 1989: 11% 1991: 12% 1995: 13% 1997: 10% 1998: 8% 1999: 7% 2003: 14% 2013: 15% 2019: 10% 2021: 11% Median: 10%
In the first half of this year, the market weathered “recession obsession” as well as such existential risks as bank failures and threats that the U.S. government might default on its debt. (Thankfully, it didn’t.)
Today, the skies look much clearer for the second half of 2023: A recovering housing market and falling energy prices are both improving consumer confidence and reducing the risk of a near-term recession. Although risks in regional banks and commercial real estate linger, they seem well understood by the markets at this point, and the election isn’t until next year (more on that later).
Fundamentally, earnings expectations are beginning to rise, and corporate margins have stabilized. There’s every reason now to expect the market will likely make additional gains.
Of course, the first half’s strong S&P 500 performance was driven by the largest stocks’ big bouncebacks. But it is reductive to say those were the only stocks that rallied. Groups such as semiconductors, homebuilders, and travel and leisure also outperformed the broad market.
In the second half, we could see catch up from groups such as industrials, real estate and healthcare.
2. Will the global manufacturing cycle finally rebound?
Global manufacturing has been weakening for over one year. But the takeaway for investors looking at today’s dire manufacturing surveys shouldn’t be that the economy is heading for a sudden stop. Rather, manufacturing and trade may have already weathered some of the darkest storms and probably won’t go through much worse. Indeed, we wouldn’t be surprised if they even began to rebound in 2H 2023.
In the longest streak of readings in contractionary territory since the Global Financial Crisis, global manufacturing activity has been slowing since the summer of 2021 and outrightly contracting since September 2022, according to the J.P. Morgan’s Global Manufacturing Purchasing Manager Index (PMI).
To be sure, weaker demand for goods drove PMIs lower. But demand isn’t the only input into PMI surveys. Falling inflation and healing supply chains are also, counterintuitively, making PMI surveys seem weaker. As commodity and goods inflation have receded and supply chains have cleared, those two subcomponents of PMI surveys have plunged.
It may be that the global manufacturing and trade cycles are finally ready to recover. Indeed, it seems difficult for some metrics to look much worse. U.S. imports from China are down nearly 40% year-over-year, which is near cyclical troughs. Also, the production of bellwether materials such as containers is down 6% year-over-year, which is the steepest plunge since 1980 outside of the Global Financial Crisis.
Key indicators show global manufacturing and trade have hit bottom
The chart describes the relationship between the U.S. container production (year over year % change) and the U.S. imports from China (year over year % change). For the U.S. container production line, the first data point came in at 0.06% in January 1990. Then it went up to 6.59% in April 1992. Later it went down to -6.38% in July 1995. Soon it went back up to a peak at 7.23% in July 2007. Then it went all the down to -14.39% in December 2008. Then it went on an upward trajectory until it peaked at 9.16% in April 2021. The series ended lower at -6.38% in May 2023. For the U.S. imports from China line, the first data point came in at 24.88% in January 1995. Then it went up high to reach a peak at 56.9% in December 2002. Then it fluctuated to go down to the worst level at -36.81% in March 2020. Shortly after, it peaked at 103.4% in March 2021. At the end, the data ended lower at -18.08% in May 2023.
But now inventories have normalized as demand has held stable, and companies could look to increase their orders as fears of near-term recession recede. Similarly, there are signs that excess capacity in the transportation sector has peaked. Any type of stimulus for policymakers in China could further kickstart what could be a natural bottoming in global manufacturing.
If global trade and manufacturing do pick up, it follows that cyclically sensitive segments of the market such as smid-caps, emerging markets and industrials could rally.
3. Will the United States have an early onset of presidential election mania?
We have consistently warned investors that history shows elections tend to have little lasting impact on markets, even if certain sectors and industries are affected by actual changes in policy. Don’t be surprised, or get rattled, if the volume on political commentary gets turned up on market channels in the second half of 2023.
Commentators need to comment. So, as many of the big market debates (inflation, recession, bank crisis, etc.) have receded, we might start hearing more pundits’ angst about the 2024 presidential election.
Rumblings already have begun as the talk shows speculate: Can any Republican nominee truly challenge Trump? Will a dark-horse Democrat challenge Biden? What might a new administration mean for the Inflation Reduction Act, healthcare policy, fiscal spending or the U.S.-China relationship?
Expect the din, but not necessarily the potential impact, to keep growing.
We can help
No matter what surprises may come this year, your J.P. Morgan team is ready to help you build a portfolio that supports your financial goals.
*It is not possible to invest directly in an index.
