Q2 2023 Market Commentary “Inflation, Inflation, Inflation”

Jul 11, 2023 | Market Updates

During the second quarter of 2023, we experienced remarkable economic and market trends, reminiscent of an airplane on its descent, preparing for a “soft landing.” Despite a restrictive Federal Reserve policy and a heated job market, the U.S. economy has managed to maintain a surprising balance, like an airplane using precise adjustments to remain stable during landing. Many factors, including declining inflation rates and their impact on the Federal Reserve’s terminal rate (the rate at which its benchmark fed funds rate will peak), a healthy employment market, and better-than-expected corporate earnings, are keeping the plane in balance through this descent.

What is a Soft Landing

Whether landing an economy or an airplane, balance is key. Should a plane tilt too much to one side while flying, the speed of the plane will decrease. If the economy remains off balance during a landing, a recession would be expected. A “soft landing” refers to a controlled slowdown in economic growth without causing a typical recession. In our current scenario, slower economic growth is exhibited through lower or negative Gross Domestic Product (a measurement of a nation’s economic growth) which also decreases inflation. If done correctly, the economy will quelch any prospects of future inflation while staying healthy enough to take off immediately after touchdown.

At GreenUp Wealth Management, we believe that we are in the process of achieving a “soft landing” and will be transitioning into a new economic expansion. With borrowing rates at 40- year highs, there is no doubt that we are in a tough financial environment. But the environment is not getting more difficult. The Federal Reserve (the Fed) has either hit terminal rates or we believe is one rate hike away. In fact, many economists expect interest rates to decrease over the next 12 months, easing stressful financial conditions. Should corporate earnings follow their forecasts of rebounding through the end of the year into 2024, the markets will continue to exhibit positive, yet volatile returns.

What Happened in the Second Quarter

During the second quarter of 2023, better-than-expected economic conditions led to positive growth for major equity benchmarks. For the quarter, the S&P 500 Index gained 8.3% and the international MSCI EAFE Index was up 1.9%. Fixed income was slightly down with the Bloomberg Barclays Aggregate Bond Index declining -0.94%.

Momentum has driven the markets higher over the last nine months since the market bottomed out on October 12, 2022. There are two possible drivers for this momentum: either the U.S. market is in the longest “Bear Market Rally” (when the stock market increases in value for a period of time before ultimately decreasing back to previous cycle lows) in market history, or, more plausibly, the market has begun a new cycle and is currently rolling in and out of an early expansion.

As the U.S. economy approaches the runway and prepares to land, the balance of our wings and engine power will determine what kind of landing we will experience. Let’s take a closer look at the wings and engine of our economic aircraft.

Right-Side Wing: Federal Reserve Policy

In June of 2022, inflation spiked to the highest levels in four decades. The Fed started steep interest rate hikes with the intent of slowing economic growth, primarily through higher borrowing costs for individuals and businesses. The increasing of interest rates can be seen as successful, thus far, as the Consumer Price Index (a common measurement of inflation) has slowed from a 9.1% year-over-year increase in June 2022 to 4.0% year-over-year as of May 2023. This is clearly a positive trend.

Although inflation has decreased significantly, it is important to note that these rate hikes are not without consequences. The lending environment has tightened — regional banks are becoming increasingly conservative, lending out less money and thereby creating a credit crunch. Although lending has slowed down, the most recent Federal Reserve Bank Stress Test did come back positive which means there is a lower likelihood that the credit crunch will become a credit crisis. The damage is still evident as a credit crunch slows economic growth.

Even with the righteous goal of containing inflation, the Fed’s actions have prompted an increase in borrowing costs across the board, leading to potential imbalances. Despite this downward, one-sided pressure, our aircraft has maintained its balance due to a healthy consumer and better-than-expected corporate earnings.

Left-Side Wing: The Consumer

In the face of increasing expenses and higher borrowing costs, the consumer continues to outperform expectations, balancing out our economic airplane. Why? The real question is why not? The consumer is benefiting from a tight labor market yielding above-inflation wage growth and controllable housing costs. We know this because the US consumer continues to spend money.

Consumer trends show enduringly high year-on-year spending, although it is decreasing, at 1.6% year-on-year growth compared to an average of 4.8%. Low unemployment rates—3.7%, with an astounding 10.1 million job openings with only 6.6 million individuals in the workforce looking for employment—is spurring consistent consumer spending. The tight labor market has led to a yearly wage increase of 5%, which is now greater than inflation as measured by the Consumer Price Index. With more room to make up, consumers are seeing their wages increase by more than inflation for the first time in this inflationary cycle.

Stable housing expenses are also boosting consumers’ positive momentum. Housing costs tend to be the largest percentage of household budgets. Like everything else, real estate values have increased, but their impact has been minimal compared to other areas of inflation. Why is that? According to Bankrate.com, at the end of 2021, 65.5% of Americans owned their home at a time when the 30-year mortgage was 3.11% vs 6.03% today. 90% of these mortgages are fixed-rate mortgages, meaning the rates never change. In other words, 60% of all Americans have no mortgage or have locked in very low mortgage rates which are not affected by the Federal Reserve’s interest rate policy. This keeps these households’ monthly expenses “low” during inflationary times.

The United States has a consumer-based economy with about 68% of our economic growth coming from consumer spending.

The Engine: Corporate Earnings

A strong consumer is not the only crucial factor in achieving this soft landing. Balanced landings are driven by powerful engines. Strong corporate earnings, lifted by healthy consumer spending, power the engine of our plane. Upon approach, an aircraft must maintain a specified landing reference speed (referred to as VRef in aviation terminology) to maneuver. The consensus among equity analysts is that we will witness a flat year of 1.1% earnings growth. Analysts are expecting negative quarterly earnings growth for Q1 and Q2 of 2023 (-2.8% and – 8.2%, respectively), prior to rebounding into Q3 and Q4 (0.2% and 8.9% respectively). Moreover, 2024 is forecasted to yield a promising 11.8% earnings growth. Although we remain cautiously optimistic, it is crucial to remember that any economic landing can be precarious. But our economic engine appears healthy enough to steer us towards a soft landing. If earnings forecasts hold true for 2024, our soft landing should be followed by an immediate take-off into an economic expansion.

Achieving an Economic Soft Landing

At GreenUp Wealth Management, we have remained cautiously optimistic, as the economy has performed better than expected since the beginning of 2023. Across the board, economic indicators have been far more positive than expected with unemployment at 3.7% vs. the expected 3.9%, the Consumer Price Index at 4% vs. the forecasted 5.8%, and overall Gross Domestic Product revised upwards to 2% for Q1 vs. the forecasted 0%. Although the numbers are not final and the government is known for revising numbers, the Atlanta Federal Reserve’s GDPNow forecasts Q2 2023 GDP to grow by at least 1.7% vs. the forecasted 0.6%.

The following chart shows data anticipating a very mild recession with two consecutive quarters of negative GDP growth in Q3 2023 and Q4 2023. However, economic conditions have continually outperformed forecasted expectations leaving the markets in better shape than predicted at the beginning of 2023. This data is continual assurance that we are in the midst of a soft landing, which GreenUp Wealth Management expects to be followed by our economic aircraft taking off and returning to flight in 2024.


  • The U.S. Economy is balanced between a restrictive Federal Reserve interest rate policy, declining inflation rates, a healthy employment market, and better-than-expected corporate earnings, making a “soft landing” possible.
  • A “soft landing” refers to a controlled slowdown in economic growth without causing a typical recession.
  • During the second quarter of 2023, better-than-expected economic conditions led to positive growth for all major benchmarks.
  • Although the Fed’s interest rate hikes have contained inflation, an increase in borrowing costs may lead to potential imbalances.
  • With low unemployment, wage growth, and relatively stable, low housing costs, consumer spending (which accounts for 68% of the U.S. economy) is helping corporate earnings.
  • At GreenUp Wealth Management, we are cautiously optimistic since the data suggests we are going through a soft landing and we expect our economic aircraft to take off and return to flight in 2024.
  • Speak with your GreenUp Wealth Advisor about how current and future economic conditions affect your financial plan.

GreenUp Portfolio Updates

Active Allocation Models (Dynamic, Index, ESG)

We increased our equity weightings across all models and increased our mid-cap core exposure in the active portfolios by adding Cambiar SMID Fund (CAMMX). In the fixed income portion of the models, we extended the duration to 120% of the benchmark or 7.56 years, added Touchstone Flexible Income Fund (MXIIX), and sold Thompson Bond Fund (THOPX).

Large Cap Stock Model

We sold Amazon.com (AMZN), Novartis (NVS), Wells Fargo (WFC), Bristol-Myers Squibb (BMY), Meta Platforms (META), CarMax (KMX), and Parker-Hannifin (PH). We bought Elevance Health (ELV), Iqvia Holdings (IQV), Salesforce (CRM), Taiwan Semiconductor (TSM), Chevron (CVX), Exxon Mobil (XOM), and Honeywell International (HON).

Tactical Equity Model

For the first time in over a year, the quarterly trend indicator turned positive in the second quarter of 2023 and the tactical equity model is now fully invested.

The performance of market indexes is discussed as indexes are generally well recognized as indicators or representations of the stock market or certain sectors. Market index performance does not normally reflect reinvestment of dividends or expenses, and you cannot typically invest in a market index. GreenUp Wealth Management may discuss and display, charts, graphs, formulas, and stock picks which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions. Consultation with a licensed financial professional is strongly suggested.

The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass.

GreenUp Wealth Management is a registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.


  • Daniel Greulich, CFA, CFP®

    Chief Investment Officer | Wealth Advisor | Ann Arbor, MI -- Daniel leads our Investment Committee and partners with Aaron Kirsch, Chief Client Advocacy Officer to design and implement client portfolios with your advisor. Daniel brings 14 years of practical experience as a trader, financial advisor, and money manager at both large and mid-sized financial services companies to GreenUp Wealth Management. In addition, he holds a CFP® designation and is also a CFA charterholder. This combination of experience and knowledge helps Dan confidently guide his clients through the development, execution and monitoring of their customized financial plans.

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