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2023 Q2 Commentary Thumbnail

2023 Q2 Commentary

The Recession That Has Yet to Come

Coming into 2023, the consensus opinion of most economists and market pundits was that the U.S. economy would enter a recession in 2023, with many expecting the contraction to begin in the first half of the year. This expectation was quite plausible given the U.S. Federal Reserve was in the midst of one of its most aggressive interest rate hiking campaigns in recent memory, in an effort to squash inflation. In addition, the yield curve was inverted, meaning short-term interest rates were higher than long-term interest rates, which is a classic warning sign of a possible recession. Some market participants reacted by reducing their equity exposure in anticipation of a coming recession. And yet the recession didn’t come, at least not to this point. In fact, the U.S. economy outperformed nearly all expectations through June, with first quarter GDP increasing by 2%. The negative sentiment and bearish positioning in the financial markets coming into 2023, that was misaligned with economic reality, ignited a stock market rally leaving some feeling left behind. The following excerpt from the Wall Street Journal highlights this very point.

“Any number of things could have derailed markets in the first half of the year. Investors kept buying risky assets anyway. … Why did the markets keep rising, despite a banking crisis, the threat of a U.S. default and more interest rate increases from the Federal Reserve? The simplest answer: Time and time again, investors’ worst-case scenarios failed to materialize. … Perhaps most important, the recession that so many economists anticipated would strike has so far remained out of sight, giving investors hope that markets might be able to keep climbing.”

Another example of how the market confounds expectations is housing. If you told investors two years ago the interest rate on a 30-year fixed rate mortgage would climb from 3% to over 6% within 18 months, and asked what impact it would have on residential real estate prices, most would have answered that they would likely decline, and maybe decline substantially. Further, if you asked how homebuilder stocks would perform in this environment, most would likely have said poorly. And yet, on both counts the consensus would have been wrong. While certain real estate markets have slowed, many markets remain very strong due to a lack of housing inventory. With more than half of all mortgages carrying an interest rate of 4% or less, many homeowners are choosing to stay put to avoid a higher monthly payment from the rise in rates. It is estimated there is a national inventory deficit of 2 million homes, which will take some time to close. This led to a rally in homebuilder stocks in 2023, with many sporting gains of 30 percent or more. Who would have thunk it?


As we enter the back half of the year, both bulls and bears remain convinced they will be proven correct. Bulls, that a new bull market in stocks has begun after suffering a decline in 2022. Bears, that this year’s recent advance will prove to be nothing more than a bear market rally that evaporates as we enter a recession later this year or in 2024. While we certainly pay close attention to the economy and financial markets, we are not in the business of divining what the future will hold in order to guide our portfolios. Rather, our focus remains on constructing diversified portfolios invested in what we believe to be resilient businesses that have the strength to weather the occasional downturn and still compound our investors’ capital at an acceptable rate over time. We choose to leave the guesswork and timing about the future to others. As Yogi Berra famously said, “It’s tough to make predictions, especially about the future.”

As always, we remain committed to helping you achieve your financial goals. 

 The opinions expressed are those of PYAW’s Investment Team. 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. Forward looking statements cannot be guaranteed.

PYA Waltman Capital, LLC (“PYAW”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about PYAW’s investment advisory services can be found in its Form ADV Part 2, which is available upon request.  PYA-23-29.