Andy Craske, the foundation’s vice president of loans and investments, shares valuable insights into the 2023 market thus far. The information should be useful to churches with FUMF Funds accounts — the Foundation’s investment funds for churches and related agencies — or anyone looking to know the state of the market right now.
How did the market react in Q2?
Key data points remain polarized, which means uncertainty is likely to endure.
While some were predicting a 2023 recession, it has failed to materialize, with labor markets and consumer strength expanding the economy instead. Whether this trend continues or leads to the soft landing, or a moderate economic slowdown that avoids recession, the Federal Reserve is looking for remains to be clear.
Looking forward, tighter lending standards, higher debt burdens and a Fed committed to 2% inflation may contribute to potential hard-landing potholes that the country has avoided so far.
Positive factors
The Consumer
Labor participation has not returned to pre-pandemic levels, creating historically low unemployment and steady wage growth—two underpinnings of consumer strength.
As inflation falls from its June 2022 peak, real wage growth has supported consumer spending. Combined with excess savings and higher interest income, wage growth has partially insulated consumers from rising debt costs.
Debt Ceiling Resolution
A debt ceiling deal reduced uncertainty and helped the U.S. avoid default, even though the agreement lacked notable spending changes. The stage is set for another showdown in 2025.
Artificial Intelligence and Productivity
In 2022, the technology sector saw a breakthrough in artificial intelligence (AI), creating AI models that interpret, learn and provide human-like responses faster than ever.
AI has tremendous potential but will require significant capital to develop the necessary infrastructure.
Negative factors
The Rising Cost of Debt
As interest rates have climbed from near-zero levels, the public debt burden may reach a record.
With savings declining, many consumers face the added burden of higher interest payments on home, auto and student loans.
Higher interest costs may also squeeze profitability for corporations that need to refinance debt.
With a significant portion of government debt maturing soon, refinancing at higher rates could require fiscal constraint and reinvigorate the debt ceiling debate.
Liquidity Constraints
Liquidity fuels the economy. Yet money supply is contracting as the Fed reduces its balance sheet, the Treasury refills its reserves, and commercial banks impose stricter lending standards.
Sticky Inflation and Fed Determination
Core inflation remains stubbornly elevated, likely resulting in additional Fed restrictions.
Overall observations on recent trends
Over the past year, labor markets have remained strong despite the actions by the Federal Reserve to slow the economy to combat inflation. This labor market strength has given consumers the confidence to continue spending, and the economy has continued expanding in response. In the second quarter, this economic resilience received an artificial-intelligence-fueled tailwind, sending stocks upward.
- While large and small-cap U.S. stock indexes posted strong results, extreme dispersion exists among sectors. The technology sector soared ahead, while four sectors sit in negative territory for the year.
- Bond investors have been forced to raise their interest-rate expectations, putting downward pressure on bond prices.
- Outside the U.S., developed international stocks enjoyed strong results.
- Meanwhile, emerging market stocks have underperformed, weighed down by disappointing economic activity in China.
- Despite modest gains for the year, real estate uncertainty remains high, especially in the office and retail sectors.
- Commodities posted a second consecutive quarterly decline, with both oil and precious metals prices sinking.
Andy Craske is the foundation’s vice president of loans and investments.
FUMF Funds are investments designed to help churches make their resources go further.