As Simon and Garfunkel sang: Hello darkness, my old friend.

Fear has crept back into the stock market. But don’t give in. If the world can sustain even slow growth, which seems increasingly possible, then the opportunities for investors have rarely looked better.

Corporate earnings growth is projected to return to positive territory in the second half of 2023 and the global economy has shown remarkable resiliency.

Technological megatrends remain on track to drive prosperity for years to come, and although they’ve been bouncing back year to date, equities as a whole are far from overvalued. Inflation is cooling and the major equity indices trade well above their 50- and 200-day moving averages.

But until we turn the corner into a sustainable bull market, we’ll have to experience bumps along the way.

The main U.S stock market indices closed sharply lower Thursday as follows:

• DJIA: -1.07%
• S&P 500: -0.79%
• NASDAQ: -0.82%
• Russell 2000: -1.64%

Wall Street is fretting anew about inflation and Federal Reserve policy. Hawkish comments revealed Wednesday in the Fed’s latest meeting minutes further soured investor moods. Fed officials made it clear that they expect additional hikes, albeit at a slower pace.

A stronger-than-expected U.S. ADP private-payrolls report released Thursday underscored the risk-off sentiment and drove bond yields higher, as inflation worries returned.

The private payrolls increase for June blew past expectations, adding 497,000 jobs compared to forecasts for 225,000 jobs added. This is the highest in over one year, with the biggest gains coming from the leisure and hospitality sectors (see chart).

Source: ADP

Services sectors accounted for the bulk of the increase in jobs, adding 373,000 jobs in June, while goods-producing sectors added 124,000 jobs. Annual pay gains rose by 6.4% year-over-year.

After a robust rally in the first half of 2023, we’re starting the second half with downward pressure on higher-valuation assets.

In a particularly worrisome sign, the CBOE Volatility Index (VIX), which measures fear and stress in the market, has spiked higher. That said, the index remains lower by over 25% year-to-date and continues to sit below the threshold of 20.

Due to the resilience of the labor market, and the outlook for an additional Fed rate hike in late July, government bond yields have climbed higher. The U.S. 2-year and 10-year yields are now approaching highs of the year, with the 2-year at around 5.04% and 10-year at around 4.05%.

The ascendancy of yields is weighing on equities, notably higher-valuation segments of the market, because the discount rate on future cash flows increases. That’s bad news for “growthier” fare such as technology stocks, which have enjoyed a torrid run so far this year.

The rise in yields does provide an opportunity to complement short-duration and cash-equivalent instruments with longer-duration bonds. These bonds not only benefit from better yields but also the opportunity for price appreciation.

Make sure your portfolio is properly diversified. Asset allocations that make sense under current conditions are 40% stocks, 30% bonds, 15% hedges, and 15% cash. These are general guidelines; tweak them according to your investor profile.

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Stocks should still dominate your portfolio. As the third quarter of 2023 gets underway, analysts are the most optimistic about the sectors of energy (64%), communications services (62%), and technology (60%). According to research firm FactSet, these three sectors have the highest percentages of “Buy” ratings.

There’s still considerable uncertainty over the economy and monetary policy, but market pullbacks so far in 2023 have been muted. We’ve only witnessed two days this year in which the market has moved by more than 2%, one up, one down.

This market has been steadily climbing the wall of worry, and despite a generally bullish environment, we haven’t run out of worries this year.

Accordingly, if you’re nervous about some of the risks I’ve just described, I suggest you consider the advice of my colleague, Jim Pearce.

Jim Pearce is chief investment strategist of our premium service Mayhem Trader. He has spent the past year perfecting a powerful indicator that’s designed to make money in a hostile market.

Jim has a proven knack for reaping profits from Wall Street mayhem. To learn more, click here for details.

John Persinos is the editorial director of Investing Daily.

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