Commentary for June, 2023

Hello all - we hope you had a nice June.  

Yes, the month hasn’t ended yet so this commentary is a bit premature, but we figured it was close enough and you wouldn’t mind anyway.  

It was a decent month for the markets, too.  Stocks started very strong, but lost ground later in the month.  The Dow has risen just about 3%, the S&P 500 gained just over 4%, and the Nasdaq, which has a higher concentration of tech stocks, rose about 4.4%. 

Here’s a look at how the markets moved this month:

As June ends, so does the second quarter and first half of the year.  It’s been a good first half of the year for the markets, too.  The Dow is up modestly, but the tech stocks in the Nasdaq have performed very well and boosted the index to its best first half since 1983!

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THE FED

The Fed was back in the news as it held another policy meeting.  As expected, they held off on raising interest rates – for now.  

Prior to now, many investors believed the Fed would actually cut interest rates later in the year.  They think the economy will slow  and that will force the Fed to lower rates to stimulate the economy.   

However, the Fed seems intent on raising interest rates at least once - and possibly twice - later this year.   

That will be a headwind for investors looking for more stimulus to boost stocks.

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INFLATION

We’ll first look at inflation before getting into the other economic data.  As you can see in the chart below, inflation continues to move lower. 

However, that is looking at inflation on an annual basis.  When you look at inflation month-by-month, inflation is still rising every month.

Inflation is also steadily rising when we exclude food and energy from the calculation (which economists call the “core” measurement). 

Inflation at the business level looks to be turning the corner and is coming down, which is a good sign for us as shoppers. 

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ECONOMIC DATA

The data released this month had both some bright spots and some dark spots.  

We’ll first look at an indicator we’ve discussed a lot recently, which is the leading economic indicator index.  It combines many other indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).  

This index has been lower for 14-straight months.  It has never gone this low without a recession following.

 

The manufacturing and service sectors of our economy both showed weakness. 

On the bright side, retail sales were higher again.

Durable goods (these are items with a longer life, like a phone or refrigerator) were higher again, too.

 

Consumer confidence took a nice turn higher, hitting its best level in two years.

Small business optimism saw a slight gain last month, though it remains very low.

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Where does the market go from here?

Markets became very overbought (expensive) this month and we were relieved when they moved lower in the later part of June (yes relieved, since we were positioned for a pullback).  Stocks became oversold (cheap) near the end of the month in the very short term, so we think a slight bounce can continue here.  

We aren’t sure how long any rise will last, though.  July has been a very solid month from a historical standpoint (it has been higher 9 of the last 10 years), but we think the longer trend is lower.  We aren’t looking for a sharp drop, at least not yet, but would be a little cautious in the longer term.      



This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for May, 2023

Hello all - we hope you had a nice May.

The month was an interesting one for the markets.  The Dow lost 3.5%, the S&P 500 rose just 0.2%, and the Nasdaq, which has a higher concentration of tech stocks, gained a solid 5.8%. 

Here’s a look at how the markets moved this month:

Notice the wide divergence in how the markets performed?  The Nasdaq was up significantly and the Dow was lower.  This was one of the big stories this month.  

Much of the performance of the markets is being driven by just a handful of stocks.  And they are all related to AI, or artificial intelligence.  

You’ve probably heard a lot of interesting stories about AI in the last few weeks and investors are excited, too.  This has driven up the share price of companies related to the technology - from computer chip-making Nvidia to other beneficiaries like Microsoft - these stocks have soared recently.  

Here’s a look at the performance of a basket of AI-related stocks:

 

The biggest names in the S&P 500 are now all tech-related.  If we were to look at just the top-seven stocks, they’ve averaged a 44% gain in the last six months.  The remaining 493 stocks in the S&P 500 have risen just 1%.  That’s quite a difference!

 

Further, the five-biggest stocks in the S&P 500 now make up nearly ¼ of the entire index!

The growth in so few stocks has distorted the performance of the markets.  It may sound great to see the indexes up this month.  However, that performance is due to just a handful of names.  Below is a chart showing the S&P 500 with every stock given the same weighting.  As you can see, the market is actually lower by this measurement.

 

This is an important consideration.  Investors call this the “breadth” of the market.  You want to see more stocks participating in an increase rather than what we are seeing now.  It is a sign the market is on weak footing and caution is warranted.

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DEBT CEILING DEBATE

The other big story moving the markets this month was the debt ceiling fight in Washington.

You’re probably already aware of the details of the debate, so we won’t get into them.  But investors were playing close attention, too.  When it looked like a deal was unlikely, the markets were lower.  When an agreement was struck, markets rallied.  

At present, there is still some uncertainty as it must pass Congress, but the odds of passage are high.  A final passage will likely help the markets.  

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THE FED

The Fed was back in the news, too, as it held another policy meeting.  They raised interest rates again, which makes borrowing money more expensive. 

This pace of rate hikes continues to be the fastest on record.

The Fed seemed to indicate they were done raising interest rates for at least a couple months, which the market liked.  

However, several regional Fed presidents made comments this month that they would like to see even more rate increases since inflation is still high.  The potential for further rate hikes made investors a little nervous and added some volatility back into the markets.

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INFLATION

We’ll first look at inflation before getting into the other economic data.  As you can see in the chart below, inflation continues to move lower. 

However, that is looking at inflation on an annual basis.  When you look at inflation month-by-month, inflation is still rising every month.

Inflation is also steadily rising when we exclude food and energy from the calculation (which economists call the “core” measurement). 

Inflation at the business level had looked like a bright spot as it was moving lower, but it moved higher again last month. 

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ECONOMIC DATA

The data released this month shows an economy that while slow, showed a little life.  

We’ll first look at an indicator we’ve discussed a lot recently, which is the leading economic indicator index.  It combines many other indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).  

This index has been lower for 13-straight months.  It has never gone this low without a recession following.

One of the leading indicator metrics is corporate profits, which as you can see in the chart below, turned lower. 

As for the good news, both the manufacturing and service parts of our economy moved higher last month, though they both remain very slow. 

Retail sales turned higher.

Durable goods (these are items with a longer life, like a phone or refrigerator) were higher again, too.

Consumer confidence moved lower again last month.

Finally, confidence at small businesses continues to languish.

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Where does the market go from here?

Its tough to tell and we don’t have a lot of conviction either way.  

A passage of the debt ceiling may provide some support to stocks.  

The Fed holds another policy meeting in mid-June and we worry they might surprise with another rate hike.  This would be a negative for the markets.  

Then there is the enthusiasm over AI stocks.  These stocks have seen massive increases – and it’s not unusual for big gains to be followed by big reversals.  The chart below shows how some of the other recent hypes have turned out.

There’s a lot going on right now, so we will remain cautious.  



This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.

Commentary for April, 2023

Hello all - we hope you had a nice April.

The month was a relatively quiet one.  The Dow gained 2.5%, the S&P 500 rose 1.5%, and the Nasdaq, which has a higher concentration of tech stocks, added just 0.1%. 

Here’s a look at how the markets moved this month:

 

And here’s the sector performance for the month (Comm services is the communications sector, which includes names like Facebook and Google, who had solid gains near the end of the month):

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After the banking crisis sent markets all over the map last month, this month was looked incredibly tame.  The market saw little volatility and there were few newsworthy headlines.  The Fed was very quiet this month, too, and had no impact on the markets.  

Economic data was generally lower, with most inflation lower, too.

The main topic this month was corporate earnings as results from the first quarter started coming in.  We’ll discuss that next.   

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EARNINGS

About half the companies in the S&P 500 have reported their earnings results so far.  The results haven’t been that bad.  Well, relatively speaking.  

Analysts expected company earnings to be down about 6.8% on average, according to analytics company Factset.  However, so far company earnings have been lower by about 3.7%.  Lower earnings are never good, but its all about beating expectations, which they did.

Earnings results have varied by sector.  Banks have not been as bad as thought, while sectors like energy and technology have fared pretty well.

One trend that continues is companies are selling less items, but have raised prices so much that they are actually earning more.  This trend cannot last, but we’ve been saying that for a few quarters and this has yet to be the case.  The image below is a headline highlighting this very subject.   

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INFLATION

We’ll first look at inflation before getting into the other economic data.  As you can see in the chart below, inflation continues to move lower. 

However, that is looking at inflation on an annual basis.  When you look at inflation month-by-month, inflation is still rising every month.  It rose only slightly last month, but it’s still an increase. 

Inflation is also steadily rising when we exclude food and energy from the calculation (which economists call the “core” measurement). 

One bright spot is inflation at the business level, or PPI, took a sharp turn lower.  This could mean lower prices for us soon.   

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ECONOMIC DATA

The data released this month shows an economy that continues to slow.  

We’ll first look at an indicator we’ve discussed a lot recently, which is the leading economic indicator index.  It combines many other indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).  

This index has been lower for 12-straight months.  As you can see in the chart below, it never goes this low without a recession following (a recession is marked by the gray shaded areas in the chart).

 

We can see the economy slowing with the GDP report, which shows the strength of an economy.  Last quarter saw the economy grow just 1.1%.  Combine this low growth and high inflation and you can safely say we are in a “stagflation” period. 

Both the manufacturing and service parts of our economy moved lower last month, with the manufacturing sector firmly contracting. 

Retail sales fell again last month.

Durable goods (these are items with a longer life, like a phone or refrigerator) were the one bright spot.  They showed a solid gain last month, although this was more due to some large airplane orders.     

Consumer confidence moved lower last month after it looked like it might be starting to trend higher.

Confidence at small businesses continues to languish.

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Where does the market go from here?

In the very short term, stocks may have some room to pop higher, but we aren’t too enthusiastic.  A big Fed policy meeting later this week may help set the tone for the month.  Investors think the Fed will back away from their reduction in stimulus and will signal an end to their increases in interest rates.  We aren’t so sure.  It will be something to watch closely.  



This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.