First Half of 2023 Finishes Strong
Hope you are doing well! June was an excellent month to be a long-term investor in the U.S. financial markets. Here's a brief June market update as we move into the 2nd half of the year.
Major U.S. Stock Indexes
Major U.S. stock indexes were on a mission in June, with the S&P 500 Index having its best month since October 2022. Investors cheered falling inflation throughout June and ended the month – and quarter – with a bang across the S&P 500, Nasdaq, and Dow Jones Industrial Average.
AI and technology were front and center all month. Markets are in love with the AI craze, and the momentum seems to defy logic for recession watchers.
For June, the mega-cap, tech-heavy Nasdaq 100 increased by 6.49%, the S&P 500 rose by 6.47%, and the Dow Jones Industrial Average saw an uptick of 4.56%.
Volatility Dissipates
S&P 500 volatility, as measured by the $VIX, dried up in June, signaling fearless and calm investors. The $VIX (also known as the Fear Index) started the month at $17.24, which was already a subdued level in the eyes of many market participants.
But fast forward to the end of the month, and the $VIX closed the month below $13.50. This kind of reading had not been seen since pre-pandemic days, not even during the stock market rally in 2021.
Moral of the story? Investors feel confident. Whether this is short-term or long-term is up for debate. Regardless, it seems market bears are currently in summer hibernation!
Bullish Sentiment Dominates Narrative - AI, Technology Outperform Industrials, Value
Many market watchers are seemingly still awaiting the most highly anticipated recession in history. Solid fundamental reasons exist for such logic, including monetary policy, elevated interest rates, inflation, and an inverted yield curve.
However, markets don’t always behave how most people think they will. Coming into the year, investors and prognosticators were pretty skeptical of much market success as the hangovers from high inflation, raised interest rates, and the anticipated recession impact from that all seemed to limit hope to treading water or modest single digit returns.
In spite of all that, and primarily due to the introduction of ChatGPT last fall, AI and tech continue to attract new investment in this surprisingly resilient economy. Mega-cap tech has been leading the market, while old-school industrials and value-oriented stocks have lagged In an unexpected, nearly complete reversal from 2022 (see chart below from Grit Capital). Seeing tech lead markets higher has been helpful for attracting some of the trillions of dollars on the sideline back to stocks and keeps the door open to broader market strength, which we saw a bit of evidence of in June.
However, a broader market rally across more sectors would be even better. That is what is on the mind of many heading into July. For as good as the top-line numbers look for the market indexes, those returns are very concentrated among a small handful of companies, with many other components of the indices being flat or negative for the year so far. More companies recovering to new highs would be very encouraging towards feeling like this could be a strong sustainable bull market.
Fed Pauses Rate Hikes
After ten consecutive interest rate hikes, the Fed finally took a break in June, leaving the benchmark overnight lending rate unchanged.
Let’s not get too excited just yet, though. Federal Reserve Chair Jerome Powell did signal more restriction is coming – and that the Fed intends to complete two more rate hikes later this year.
Back in March, expectations were for one more rate hike in 2023, and we are now at two for the remainder of 2023. Still, a more hawkish-sounding Fed didn’t deter the appetite of stock market bulls as June came to a close.
Treasury Yields Rise
The benchmark 10-year note yield rose in June, settling near 3.82% for the month, up from the May monthly settlement near 3.63%.
In recent days, Fed Chair Powell has sounded hawkish – meaning more rate hikes are on his mind – and economic data has also been healthy, contributing to a rise in yields.
Short-term duration Treasuries also rose in June, and the 2/10 yield curve has remained inverted. An inverted yield curve is a classic sign of recession. So far, this stock market will not hear it!
Jobs Growth
Nonfarm payrolls for May (released in June) again showed continued labor market strength. The jobs number came in way above expectations, showing 339,000 jobs created versus 190,000 expected. Professional and business services led the way in job creation.
Rising interest rates are intended to cool job demand, yet employers continue to add workers at a healthy pace. The American labor shortage is quite a phenomenon, and in some locales, it may be difficult to locate skilled trade workers.
This strong employment data leaves the data-dependent Fed’s pathway to higher interest rates open.
Inflation: Lowest Year-Over-Year Data in Two Years
The most recent Consumer Price Index (CPI) data for May, released in June, had Wall Street bulls on parade:
Headline CPI increased 4% from one year ago, a two-year low.. There's been a big retreat since the 9.1% peak in June 2022. Restrictive monetary policy is having an impact. While there are still unknowns, things are clearly cooling down in some areas (food prices are still 6.7% higher than a year ago). As you can see below, this headline number is helped greatly by a deflationary impact from energy the last few months.
The focus now turns to core inflation. It's sticking around for longer and not going down as fast. Core CPI (which excludes volatile food and energy) rose 5.3% from one year ago with Shelter as the by-far dominant factor.
Inflation and the job market have left Jay Powell with a "higher for longer" message, even though the fixed-income market isn't convinced and seems to be pricing in rate cuts in 2024. Considering that inflation was running at a 6% clip year-over-year back in March, stock market bulls had lots of logic behind their stampede into stocks last month.
Message of the Markets
So what is the message of the markets right now? One message seems to be that declining inflation metrics are superseding the inverted yield curve and Fed-induced recession fears. Many will argue that this message does not make sense – and that is yet another reason that it's beneficial to be a long-term investor, because often these day-to-day and month-to-month movements don't make a lot of sense to even the best and brightest economic minds.
If a trader or investor was trying to time the market in March during the regional banking panic, they more than likely would not have participated in the gains we just saw in June! Long-term investors stay the course with discipline, diversification, rebalancing, (and reinvestment when possible). Let's keep moving forward.
With that said, please feel free to reach out if you have any investing questions or concerns. I am always here as a resource for you.
All the best,
Jeff Boyd and the Phase Four Financial Solutions team
Registered Representative offering securities and advisory services offered through Independent Financial Group, LLC (IFG), a Registered Investment Adviser. Member FINRA/SIPC. Phase Four Financial Solutions and IFG are unaffiliated entities.
No investment strategy can guarantee a profit or protect against loss. The market indexes discussed are unmanaged and generally considered representative of their respective markets. Individuals cannot directly invest in unmanaged indexes. Past performance does not guarantee future results. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Diversification does not guarantee profit nor is it guaranteed to protect assets.
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