June Economic Update
May presented a complex landscape in the US stock market, characterized by mixed economic signals and market performance, painting a picture of cautious optimism with lingering uncertainties. The major US stock indices characterized this uneven landscape with their monthly performance. The broad-based S&P 500 was almost flat for the month with a 0.25% gain while the tech-heavy Nasdaq 100 rallied 7.61%. The less Dow Jones Industrial Average lost -3.49% and the small cap Russell 2000 moved lower by -1.09%. (1)
The story within the stock market the past couple of months has been dominated by outperformance in a handful of technology companies which is juxtaposed with underperformance in most other sectors. This shallow market breadth raises several questions, such as whether the underperforming sectors will eventually turn higher, if technology stocks need a downside correction, or some combination of the two.
To sift through the market breadth question, we look toward economic data which also painted a complex and mixed picture. Inflation remained a persistent concern in May, with Core CPI and PCE metrics remaining elevated and within the same ranges as the past few months. Employment data and GDP numbers remained strong, which signals the underlying economy has thus far been able to cope with higher interest rates but the expense of private sector profit margins. Concerns over stagnant wage growth and labor shortages also persisted. Leading indicators such as ISM manufacturing data showed continued weakness, while lagging indicators such as ISM services data yielded more positive results.
The Federal Reserve
The major economic releases last month will play a large role with the Federal Reserve’s interest rate decision which will be announced on June 14th. Most analysts and market participants agree that another 0.25% interest rate increase is likely to happen either at the June or July meeting, but uncertainty looms beyond that assumption. The Fed has reiterated that they will remain “data-dependent” with their decisions, which given the robust jobs data and inflation remaining elevated, generally points towards the direction of an interest rate increase coming sooner rather than later.
As we approach the halfway point for the year, there are increasingly more questions than answers. This year has seen a significant bifurcation between market sectors with less than a dozen technology stocks rallying double digits while hundreds of other stocks within the S&P 500 retreat to new lows. In some ways, we are experiencing recessionary moves with the broader market which may be approaching attractive oversold valuations.
At the same time, we are seeing tech stocks potentially approaching bubble territory with many companies trading above 400 price-to-earnings ratios, approximately 20X higher than traditional valuations. All of this is occurring within a macro-economic landscape and the Federal Reserve which are both signaling a recession happening sometime later this year.
These conflicting signals could continue through next month as we wait for more confirmation regarding the impact of higher interest rates which are above 5%. Slow and lagging indicators such as home sales and employment data will become focal points as the 10-12 month lag for interest rate impacts to begin taking effect into mid and late summer. During that time, it is likely that we will continue to see market sectors move independently of one another with mixed breadth signals within each index.
Monthly Financial Tip:
Allocate at least 20% of your income toward financial priorities such as emergency savings, paying off debt, and saving for retirement.
1. WSJ.com, May 31, 2023
This post has been derived from sources believed to be accurate. Please note - investing involves risk, and past performance is no guarantee of future results. Bob Lawson is not engaged in rendering legal or accounting services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.