The first half of 2023 is behind us. The Fed’s discount rate has gone from 4.5% to 5.23%. We had 3 bank failures that heightened awareness of the vulnerability of banks that take excessive interest rate risk. Inflation has remained higher and stickier than central banks would like. The Russian war with Ukraine drags on while China threatens to invade Taiwan, potentially destroying a huge chunk of the world’s semiconductor supply. Meanwhile, the debate about hard or soft landing is tilting away from recession since the Fed’s recent pause on the next interest rate hike. Political discord continues.

Seems mostly grim. But notice that the S&P 500 was up 8.3% in the second quarter, and 15.91% year-to-date according to Morningstar. If this is what happens when things are bad, image what would happen if we could all get along?

Short-term market forecasts are subject to the vagaries of news flow and emotions. Over the long term, economic reality matters. While the recent runup feels nice, the market appears to be approaching fair value. Part of the rebound is from the discount it suffered last year when rising interest rates and surging inflation caught the market off guard. Now it appears inflation has peaked, and further interest rate increases will be modest, if they are necessary at all. The issue now is when inflation will recede to the Fed’s 2% target. Economic data will drive the Fed’s decisions as well as the market.