June 2023 Market Update: Recession Signals, AI Stocks, and the Disconnect in Markets
Throughout 2023, one of the most common questions we've received from clients has been surprisingly simple:
"If recession risks remain elevated, why is the stock market moving higher?"
It's a fair question, and one that highlights just how unusual the current environment has been. On one hand, several economic indicators have continued to point toward slower growth and an increased probability of recession. On the other hand, a relatively small group of technology companies has helped push major market indexes higher.
In this update, we share our perspective on the economy, Federal Reserve policy, recession indicators, and the growing influence of artificial intelligence-related stocks on market performance.
Why We Continue to Watch Economic Growth Closely
One of the tools we use to evaluate the broader economy is the Quad Framework developed by Hedgeye. The framework tracks changes in economic growth, inflation, and policy trends to help identify the types of environments that have historically been associated with increased market volatility.
As we reviewed the data during the summer of 2023, many of the indicators continued to suggest a slower-growth environment. While there were signs of temporary improvement, the broader trend still pointed toward a more challenging economic backdrop heading into 2024.
The Federal Reserve Remains in the Driver's Seat
For much of the past two years, one theme has remained consistent: the Federal Reserve has been one of the most influential forces shaping both the economy and financial markets.
The aggressive interest rate hikes implemented to combat inflation have helped slow economic activity, tighten financial conditions, and reduce liquidity throughout the system. Historically, prolonged rate-hiking cycles have often been associated with economic slowdowns and, in some cases, recessions.
While timing economic cycles is never easy, we continue to believe that understanding the impact of monetary policy remains critical for investors.
What the Inverted Yield Curve Is Telling Us
Another indicator we continue to monitor closely is the yield curve.
Historically, when short-term Treasury yields rise above long-term Treasury yields, known as an inverted yield curve, it has often signaled increased recession risk. While no indicator is perfect, the yield curve has developed a strong historical reputation as one of the more reliable leading indicators of economic slowdowns.
At the time of this update, the yield curve remained deeply inverted, continuing to suggest elevated recession concerns despite the economy's ongoing resilience.
The AI Rally and Market Concentration
Perhaps the most fascinating market story of 2023 has been the rise of artificial intelligence and its impact on stock prices.
A relatively small number of large technology companies benefited enormously from investor enthusiasm surrounding AI-related opportunities. As a result, the cap-weighted S&P 500 significantly outperformed many other areas of the market, including equal-weighted indexes and dividend-focused stocks.
This created a notable divergence beneath the surface. While headline indexes appeared strong, many sectors and companies were experiencing a very different reality. In our view, this served as an important reminder that market concentration can sometimes distort perceptions of overall market health.
Looking Beyond the Headlines
One of the recurring lessons from 2023 has been the importance of looking beyond headline market returns.
Economic growth, inflation, interest rates, corporate earnings, market breadth, and valuation all matter. Focusing on a single narrative—whether it's recession fears or AI enthusiasm—can sometimes obscure the broader picture.
As advisors, our focus remains on evaluating the full range of economic and market data while helping clients maintain perspective during periods of uncertainty.
Watch the video to hear our latest thoughts on recession risk, Federal Reserve policy, the inverted yield curve, AI-driven market performance, and the economic trends shaping the investment landscape.
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