Quarterly Performance Update

Second Quarter 2023

Bolstered by resilient economic data, stocks and other riskier assets rose for the quarter. Meanwhile, persistent inflation and still-hawkish central bank policy pushed global yields higher, and most bonds declined for the three-month period.

U.S. Stocks

Stocks defied expectations in the second quarter, with the S&P 500^® Index surging nearly 9%. Despite banking industry stress, a U.S. debt ceiling showdown, persistent inflation and a Federal Reserve (Fed) still in tightening mode, stocks continued to climb.

Better-than-expected first-quarter earnings results helped investor sentiment, but the fizzling of some worst-case scenarios also provided a boost. For example, following several high-profile bank failures, swift action from regulators helped avert a system-wide meltdown.

In early June, Congress negotiated a debt ceiling deal to avoid a feared government shutdown. After raising rates another quarter point in May, the Fed took a break in June and suggested it was nearing the end of its tightening campaign.

Meanwhile, the long-predicted recession remained elusive, giving markets some hope that policymakers may be able to engineer a soft landing. While most S&P 500 sectors advanced for the quarter, double-digit gains from the information technology, consumer discretionary and communication services sectors propelled the index higher. The second-quarter rally extended the S&P 500’s year-to-date gain to 17%.

International Stocks

Non-U.S. developed markets (MSCI World Ex-U.S. Index) also advanced in the second quarter, but at a more modest 3% pace.

European stocks rose but underperformed the broader world index, as data confirmed the eurozone entered a mild recession in the first quarter. The region’s manufacturing downturn deepened in the second quarter, while the services sector slowed but remained expansionary. Inflation moderated but stayed stubbornly high, prompting the European Central Bank to lift rates in May and June.

Meanwhile, U.K. stocks advanced but underperformed the broader market alongside high inflation and mixed economic data. With annualized inflation at 8.7%, policymakers lifted rates by 0.75 percentage points in the quarter.

Elsewhere, fading optimism about China’s economic recovery weighed on emerging markets stocks (MSCI Emerging Markets Index), which gained only 1% for the quarter.

Global Bonds

Amid upbeat economic data and changing expectations regarding Fed policy, U.S. Treasury yields resumed their upward march in the second quarter. The two-year Treasury yield jumped from 4.03% to 4.90%, while the 10-year yield rose from 3.47% to 3.84%.

Investor expectations for a late-year Fed rate cut faded, as policymakers signaled the June rate-hike pause probably wouldn’t be permanent. The Bloomberg U.S. Aggregate Bond Index returned -0.8% for the quarter, with rate-sensitive sectors underperforming credit-sensitive bonds.

U.S. bonds maintained a year-to-date gain. Similarly, government bond yields in the U.K. and Europe ended the quarter higher. The U.S. dollar rose modestly, and global bonds returned 0.1% for the quarter.

With risk assets in favor, emerging markets bonds advanced across the board for the quarter.