June Market Review
As the first half of 2023 is behind us, equity markets proved the most resilient. A June highlight was a pause by the Fed in lifting short term interest rates. At their June meeting, Chairman Powell left interest rates at 5%-5.25% (the first pause in 15 months of rate increases) but did suggest rates may need to rise further to tackle sticky inflationary pressures. Surprisingly, solid economic data and a vigilant FOMC kept bond markets muted. Cash returns continue to adjust higher as 2 more increases in short-term rates are being priced into money markets.
The S&P notched a positive performance (+6.61%) month as market strength broadened out to other sectors beyond “mega-tech” companies. Nasdaq led with a +6.66% return in June, while the Dow Jones Industrial Average rose 4.68%. Consumer discretionary, industrial, and material sectors rose over 10% last month, while technology, financials, and energy companies rose over 6%. Recessionary sectors rose the least (consumer staples, communication services, and utilities) suggesting an economic slowdown has been pushed out. A staggering +16.88% SPX total return for the first half of 2023, may have some investors “throwing in the towel” on defensive positioning. Others will look protect strong gains and avoid extended valuations as risks remain.
Interest rates continued to rise in June, hitting levels not seen since March. Shorter bonds have seen sharper increases in yield, as the Fed’s message on more tightening has become clearer. US two-year Treasury notes rose 49 basis points in June to yield 4.90%. The US ten-year Treasury note rose 19 basis points to yield 3.80%. Treasury bills remain the highest yield on the US curve with 6-month maturities yielding 5.50%.
Credit sectors, including both high yield and investment grade, had an excellent June performance despite rates. With continued economic strength and a strong US consumer, risk premium spreads tightened as equity markets rose. Industrial names rose the most, and lower quality names had stronger gains. High yield and Emerging market debt continued to outperform other bond sectors.
Municipal bonds also saw a strong return month despite a higher US yield curve. Municipal bond funds saw inflows and new supply was well received by investors. Continued troubled bank selling of municipal debt, was easily digested by investors satisfied with longer-term tax-free yields. With interest rates rising, and municipal bonds remaining stable, some sectors have become historically expensive (less than 70% of the yield of comparable treasury price ratios).
The “hawkish pause” in June, after a “dovish hike” in May, left many investors thinking the end of a Fed cycle is near. Continued strength in the economy was the most helpful for risk markets in some time. Investors pushed the timing of an upcoming recession further out. The surprised strength from the US consumer worried the FOMC that a further slowdown in inflation could be difficult.
The month kicked off with a “blow-out” jobs report on June 2nd. Stocks rallied and interest rates rose as May payrolls came in much higher than consensus at 339K new jobs. April’s strong report was even revised higher by 41k. Markets were supported by robust economic figures and lower inflation data, energizing “soft-landing” arguments for the second half of 2023.
Inflation data, while still well above FOMC target, was tame for the most part in June. The final first quarter release of unit labor costs in Q1 came in on June 1st and were much lower than expectations (4.2% versus an expected 6% rise in labor costs). Prices paid indices in both manufacturing and service sectors were lower than in prior months. Both CPI and PPI levels were at or below expectations, which probably gave the FOMC a fair reason to pause and watch more data. At month end, GDP price index and Core PCE data were both reported slightly lower than their previous reading.
The US consumer has remained strong. June was a great example of this, and markets reacted accordingly. Durable goods orders remained steady, and retail sales numbers were better than expectations. The monthly consumer confidence report rose to 109.7 from 102.5 in May, its highest reading since January of 2022. Personal income was higher, while spending did fall slightly in May. Possibly the biggest surprise in data last month was the overall strength in the housing market. Despite higher interest rates, housing starts were up 21.7% in May. Building permits also rose. Existing home sales beat expectations of -0.7%, coming in at a 0.2% increase. New homes sales jumped 12.2%. Pending homes sales data were the only weak report, coming in at -2.7%.
As the 2nd quarter came to an end, investors were left with an economy that continues to outperform, and a Federal Reserve that does not seem finished lifting rates to combat price stability. Many Fed officials see two more rate hikes in the coming meetings, and on June 21st, Chairman Powell reiterated his hawkish stance, not ruling out rate hikes in the next two FOMC meetings. On the very next day, the Bank of England raised rates by a surprising 50 basis points (25 basis point expectation).
On June 26th markets shrugged off a weekend attempted government coup in Russia. Just another reminder that high interest rates may not be the only risk to global markets.