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Bond market mayhem.

The bond market had a year to forget in 2022. 2023 is shaping up to be more of the same. Strong economic data and ballooning U.S. debt are the two most credited reasons why rates have continued to rise and bond values decline.

Good economic data is usually a positive for investment markets, right? Not always. In this instance it is being interpreted to mean the Federal Reserve is likely to keep interest rates elevated for longer than investors previously expected. Higher rates increase the costs for businesses and consumers to borrow and fund consumption. The result? Economic slowing and less profits for companies. 

This expectation of higher rates and a feared economic slowdown has been a big reason for the bond market slump. Add in that the U.S. government keeps contributing to the total U.S. debt at a believed unsustainable rate and you get a lack of demand in the bond markets. 

War in the Middle East.

The terrible conflict between Hamas and Israel has added to jitters in the investment markets. Energy markets have been most directly impacted, as fears of a widening conflict that spreads to additional countries have introduced expectations of a spike in the price of energy.

Corporate earnings.

Earnings are coming in above expectations at a higher rate and magnitude than in the recent past. It seems that companies are returning to growth following a trough in corporate earnings over the past year. This is a trend that needs to continue if markets are going to make meaningful progress towards achieving new highs over the next year.

The market returns for 2023 have largely been due to a small number of companies dubbed “The Magnificent 7” – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. While earnings have been solid, the market’s momentum is closely tied to these Mega Cap Technology companies. Their inability to move higher from already pricey valuations has contributed to the lack of support in market gains since the summer.