Monthly Market Commentary

These monthly market commentaries share a synopsis of the U.S. financial markets with intelligent insights.

Written June 2023,

May’s market environment was largely a repeat of April, with wide disparity in returns across sectors, styles and market caps.  Most of the positive performance was in a small subset of large to mega cap growth oriented stocks.  Investors were faced with uncertainty about the direction of the economy with both positive and negative signals, a Fed that continued to raise interest rates but opened the door to a “pause”, and an overhang of the debt ceiling debate.  The bond market saw rates move slightly higher across much of the curve, with very short rates jumping on possible default concerns.  Foreign markets sold off on growing economic and political stress across Europe. 

Here are a few high-level comments on what occurred across the public investment markets during the month:

Overall 

• The S&P 500 was up 0.43% as due to a small number of stocks posting strong returns. 
• The Bloomberg Aggregate Bond Index was down up 1.09% as rates were up modestly during the month.            

Domestic Equity

• Equity market returns in May continued to be mixed as investors weighed potential changes in Fed moves, signs of slowing economic conditions, and debt ceiling debates.
• Growth stocks handily outperformed value stocks, driven by the outsized returns of select stocks such as Nvidia and Meta.  The YTD spread between RU1G and RU1V reached 22% at month end.

International and Global Equities

• Foreign stocks fell behind US stocks in May and YTD, driven by concerns over slowing economic growth in Europe and a strengthening dollar.
• Emerging Market equity returns outperformed developed overseas returns despite China -8.4% decline in May.  Chinese stock market volatility has been elevated throughout 2023. 

Fixed Income Markets

• Bonds posted negative results across the board as interest rates shifted higher while credits spreads were mixed.  Very short-term interest rates rose sharply as the debt ceiling debate played out. 

Specialty Markets

• Specialty Market indices were down in May, led by the 10% decline in oil prices.  REITs were down across most sectors.

US Equity Sectors

• The three positive performing sectors (Communication Services, Consumer Discretionary, and Technology) were driven by a small number of names that produced outsized returns. 

Dear Valued Investor,

Every so often Washington likes to remind us how hard it can be to get things accomplished. The most recent example is the debt ceiling—the amount Congress can borrow to pay its bills. It seems like we have this debate every few years and in the end a deal is made, which is just what happened this time. Considering equity markets never really reacted to the drama, perhaps this is a good reminder that focusing on long-term objectives is the best strategy, even amid a fair amount of market noise.

With the debt ceiling drama behind us, markets will likely return their attention to topics such as inflation, the health of the economy, and the Federal Reserve (Fed)—who is scheduled to meet June 14-15. Expectations are that they will not raise short-term interest rates for the first time in 10 meetings. The Fed has done a lot of heavy lifting already—raising short-term interest rates by 5% in just over a year. Since rate hikes tend to have a long and variable lag, the Fed wants to see how those rate hikes more fully flow through the economy before its next move.

The Fed’s goal has been to elevate the fed funds rate and make the cost of borrowing money prohibitively expensive, to slow aggregate demand. While this has exposed some cracks in the regional banking sector, it should allow inflationary pressures to abate. But then what? After winning its fight with inflation, the Fed is expected to start cutting rates early next year. Just as the aggressive rate-hiking cycle took Treasury yields higher, interest rate cuts will take Treasury (and other bond market) yields lower. Both lower inflation and an end to rate increases could be welcome news for core bonds, especially intermediate core bonds, which have tended to perform well after rate-hiking campaigns. Investors may be better served by locking in these higher yields before they’re gone.

Only time will tell, but it feels like we’re finally on a path to lower interest rates and the end of this inflationary cycle. Of course, there will be other challenges to deal with, that’s just the dynamic nature of the market. But in the meantime, returning to the familiar—lower rates and the end of inflation—is something we can all rally around.

Please reach out to me if you have any questions.

Scott Krase