June 2023 Market Update
Last month we mentioned just how few stocks were creating all the gains in the markets this year. That trend continued with the S&P 500 up nearly 9% through the end of May. However, the equal-weighted S&P 500 index (each of the 500 carries the same weighting regardless of company size) is actually down -0.71% YTD. This is the widest outperformance by the S&P 500 vs Equal-Weighted index since 1990! We really try to avoid charts/nerd stats in these commentaries, but this graphic really illustrates what’s taken place this year. In short, the blue line is the Big 7 Tech names getting all the attention while the other lines represent everything else.
While we love big market gains as much as the next guy, it’s simply hard to overstate just how narrow the returns have been this year and we’d feel a lot more confident in the sustainability of this rally if it was considerably more broad-based. Value stocks, or most anything with a dividend, has struggled this year while large-cap stocks have outperformed small-cap stocks by the widest margin since 1997. The market is overbought right now and probably due for a breather. Even in the best of years, the markets typically have a 5-10% correction at some point so that wouldn’t be abnormal. My guess is we have a bit of a pullback sometime soon.
There are plenty of things to be positive about right now: earnings have been much better than feared, inflation is falling, GDP is still positive, unemployment is extremely low, consumers are still driving this economy, and with the last rate hike on May 3rd the Fed looks to pause further rate hikes to let the “medicine work.” Will they resume raising rates in the coming months? We’ll see but either way we feel we’re at or nearing the final stages of the rate hikes.
Of course, there’s also plenty of things be concerned about: inflation is still well over the Fed’s target of 2%, housing is at the most unaffordable level in decades, and most every Leading Economic Indicator has turned red, pointing towards recession. The yield curve is massively inverted. (The 1yr US Treasuries is 5.2% while the 30yr is only 3.89%). Office building vacancy rates across the U.S. hit a record +16% this month. Add to the fact that banks look to tighten lending standards for the foreseeable future and it’s easy to see how commercial real estate may be in for a rocky road.
Ultimately these issues will resolve themselves though. You can look back every single year in history and find 2 or 3 fears / “crisis” / reasons not to invest, but much of that is only relevant in the very short term. For serious investors with a long-term time horizon the market goes up more than it goes down. In fact, since 1920, the odds of a positive return in the markets in any 1 year is 75%; it’s even higher if you extend that to any 5-year time frame where it’s positive 88% of the time.
The bear market, which is in month 17 now, has given us an opportunity to buy great companies at discounted prices. While we entered the year a bit more defensive, we’ve moved to a more neutral stance. International markets look much better than they have in years. And with fixed income rates the best we’ve seen in decades, we think bonds may do a much better job complimenting a balanced portfolio going forward than they have in the past few years. To sum up our thoughts right now: Diversification works, don’t chase the tech rally.
In closing, last month I mistakenly made a reference to the phrase “batting down the hatches.” One of our great readers was kind enough to inform me that is, however, incorrect. The proper use of the phrase is “batten down the hatches.” (As in batten down the ship’s hatches to prepare for storms). In my defense, I’m from Iowa and know more about corn fields than I do sea life!
Speaking of cornfields, here’s your Useless Fact of the Month: America’s smallest town is Monowi, Nebraska with an official population of 1. Her name is Elsie Eiler and is the town mayor, secretary, clerk, and bartender of the sole tavern. But recently, according to 2020 Census data, Monowi’s population had exploded by 100% and was now home to two people. When asked who the new resident was, Elsie replied, “Well, then someone’s been hiding from me, and there’s nowhere to live but my house. But if you find out who he is, let me know?”
The new “resident” is named Noise and was created by an algorithm by the Census Bureau to protect Elsie’s personal information. So, for now, Elsie gets to keep her claim to fame.
In closing, we wish all the dads out there a Happy Father’s Day this month!
As always, thank you for being a client,
Sean & John
This is not a recommendation to purchase or sell the stocks of the companies mentioned. There is no assurance the trends mentioned will continue or that the forecasts discussed will be realized. Past performance may not be indicative of future results. Economic and market conditions are subject to change. The Dow Jones Industrial Average is an unmanaged index of 30 widely held stocks. The NASDAQ Composite Index is an unmanaged index of all common stocks listed on the NASDAQ National Stock Market. The S&P 500 is an unmanaged index of 500 widely held stocks. The MSCI EAFE (Europe, Australia, Far East) index is an unmanaged index that is generally considered representative of the international stock market. The Russell 2000 is an unmanaged index of small‐cap securities. The Bloomberg Barclays US Aggregate Bond Index is a broad‐based flagship benchmark that measures the investment grade, U.S. dollar‐denominated, fixed‐rate taxable bond market. An investment cannot be made in these indexes. The performance mentioned does not include fees and charges, which would reduce an investor’s returns. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance, and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Be sure to contact a qualified professional regarding your situation before making any investment or withdrawal decision.
Brokered Certificates of Deposit (CDs) purchased through a securities broker and held in a brokerage account are considered deposits with the issuing institution and are insured by the Federal Deposit Insurance Corporation (FDIC), an independent agency of the US, Government. FDIC deposits are insured up to $250,000 per issuer (including principal and interest) for deposits held in different ownership categories including single accounts, joint accounts, trust accounts; IRAs, and certain other retirement accounts. The deposit insurance coverage limits refer to the total of all deposits that an account holder has in the same ownership categories, at each FDIC-insured institution. For more information, please visit fdic.gov. About Liquidity: Funds may not be withdrawn until the maturity date Or redemption date, However, the brokered CD, are negotiable, which mean, that although not obligated to do so, Raymond James and other broker/dealers presently maintain an active secondary market at current interest rates, Market value will fluctuate and, if the CD is cashed out prior to maturity, the proceeds may be more or less than the original purchase price, Holding CDs until term assures the holder of par value redemption. CDs are redeemable at par upon death of beneficial holder. FDIC insurance does not protect against market losses due to selling CDs in the secondary market prior to maturity.
Bond prices and yields are subject to change based on market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. Holding bonds to term allows redemption at par value. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.
Investing in the energy sector involves special risks, including the potential adverse effects of state and federal regulation, and may not be suitable for all investors. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Those markets are likely to be volatile, and there may be sharp price fluctuations even during periods when prices overall are rising. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.