Fireworks aren’t the only thing flying high and making us say, “ooh and ahh”.

Financial markets have been putting on their own show so far this year, and it continued in June as the Dow Jones Industrial Average rose 4.7%, the S&P 500 advanced 6.6%, and the NASDAQ charged 6.8% higher. June was an especially good month for small-cap stocks; the Russell 2000 Small Caps index surged 8.1%. Globally, the MSCI Developed Markets index tacked on 4.6% and its Emerging Markets counterpart increased 3.9%.

All 11 US stock sectors were positive in June. Of note, Consumer Discretionary, Industrials, and Materials all posted double-digit gains. Though defensive sectors such as Health Care, Consumer Staples, and Utilities were at the bottom of the pack, they joined the other eight sectors in contributing to June’s market rally.

What is driving these outsized returns? The Federal Reserve? The Fundamentals? Or FOMO (the fear of missing out)? Supposedly Artificial Intelligence could provide the answers.

The Federal Reserve and The Fundamentals

The Federal Reserve’s (Fed) preferred inflation metric eased in May, slowing down to 3.8% from a year ago and prompting them to choose to hold the Target Federal Funds Rate at 5.25% during its June 14th meeting. This decision ended a streak of ten consecutive rate increases, though chairman Jerome Powell indicated the possibility of two more hikes in 2023.
Fed Chair Jerome Powell has popularized looking at the inflation dynamics of core services excluding housing. This annual rate rose 0.2% in May, the smallest rise since July 2022, pulling the annual rate to 4.5%. US Inflation cooled to 4.05% in May, its lowest level in two years. The year-over-year US Producer Price Index rose only 1.1% in May, its smallest monthly increase in two and a half years.
Real consumer spending was stagnant in May after only a modest gain in April as consumers slowed spending habits. Consumer spending, adjusted for inflation, was unchanged in May as consumers pulled back demand for durable goods. Investors should see this as the setup for a downshift in consumer activity for the remainder of 2023.
The savings rate ticked up in May, as consumers seem to be increasingly cautious about the economic outlook. Consumers saved 4.6% of their personal disposable income, the highest since January 2022.
Unemployment—Initial claims for the past two weeks came in sharply below economists’ consensus expectations. Meanwhile, continuing claims, which are tallied with a one-week lag relative to initial filings, also were below both the prior weeks’ levels and economists’ expectations. The labor market is expected to further loosen over the coming months as companies respond to slowing demand, partly driven by the Fed’s tighter monetary policy.
The US ISM Manufacturing PMI continued its multi-year decline in June, falling another 0.9 points to 46.0.
US New Single-Family Home Sales surged 12.2% in May, while US Existing Home Sales was up a slight 0.2%. Despite the relatively flat month in existing home sales, the Median Sales Price of Existing Homes rose by 2.6% to $396,100. Mortgage rates ticked up slightly in June: 15-Year and 30-Year Mortgage Rates closed out the month at 6.06% and 6.71%, respectively.
Real gross domestic product (GDP) increased at an annual rate of 2.0 percent in the first quarter of 2023, according to the “third” estimate. In the fourth quarter of 2022, real GDP increased 2.6 percent. The GDP estimate for the first quarter was revised up 0.7 percentage point from the “second” estimate, primarily reflecting upward revisions to exports and consumer spending.

Key takeaways:

Inflation continues to fall, prompting the Federal Reserve to pause and not raise rates, but more hikes could come if deemed necessary.

The economy continues to slow due to higher interest rates and a slowing of consumer spending and opting to increase savings in a more cautious tone.
The labor markets remain relatively strong.
The fundamentals really don’t explain the outsized performance of the market indexes so far this year. Rather, one could point to the more emotional driver—FOMO. With Artificial Intelligence and all the possibilities it may bring, there certainly is future growth potential, but it seems a bit premature to provide such gains in such a short period of time.

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Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk.

The economic forecasts set forth in this material may not develop as predicted, and there can be no guarantee that strategies promoted will be successful.

Monthly Market Recap – June 2023

Fireworks aren’t the only thing flying high and making us say, “ooh and ahh”.