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Market Currents – 6/16/23

  • Mixed May for Markets. Stocks recorded modest overall gains in May, after positive earnings surprises and the passing of the debt ceiling bill fostered a month-end rally.  Returns contrasted starkly within the S&P 500 index, however, with only a handful of stocks driving the index higher on the year.  Burgeoning enthusiasm surrounding artificial intelligence (AI) help propel the technology sector to strong gains.  Meanwhile, energy stocks, after a stellar 2022 performance, experienced notable softness.  Large-cap and growth stocks also outperformed their small-cap and value counterparts by wide margins.  Bonds recorded slight losses as U.S. Treasury yields increased across all maturities.


  • Disinflation. The latest updates of different inflation indicators for the economy indicate a common trend:  the strengthening of disinflationary pressures.  The May Consumer Price Index (CPI) cooled to its lowest annual rate in more than two years, falling to 4.0% from 4.9% in April.  Similarly, the Producer Price Index (PPI) showed that inflation at the wholesale level retreated to well below its pre-pandemic average.  S Import and Export prices also undershot the Street consensus.  Meanwhile, emerging commentary from management in certain corners of retail suggested that price momentum in the goods they sell may be peaking.


  • Hawkish Pause. In the June 2023 Federal Open Market Committee (FOMC) meeting, the Federal Reserve voted not to raise the federal funds rate, ending a run of 10 consecutive hikes by the central bank dating back to March 2022.  While the move was widely expected, the release of their summary of economic projections suggests its hawkish tone on curbing inflation remains intact, and additional rate hikes in 2023 remain a possibility if inflation remains stubborn or re-accelerates.


  • Narrow Leadership. Despite the positive start, the leadership of the market advance has been notably narrow.  Just seven stocks – all mega-cap tech giants – account for nearly all of the S&P 500’s gains year-to-date.  The S&P 500 is a market capitalization weighted index; meaning larger companies have an outsized influence on the overall performance of the index than smaller ones.  In contrast, the S&P 500 equal-weighted index, where each of the 500 companies has an equal contribution, is flat for the year.  While it’s logical that investors seek out the higher quality, well-established mega-caps with sustainable growth profiles and fortress balance sheets in times of uncertainty, a prolonged narrow breadth of market advance raises questions about the health and risk appetite of the broader market.


  • Market Outlook. The impressive rally in a relatively short period of time is giving us slight reason to take a pause.  However, our longer-term outlook on the fundamental backdrop continues to trend cautiously optimistic, supported primarily by corporate earnings outperforming expectations and recovery in the second half of 2023, intensifying disinflationary trends, and a Federal Reserve rate hike cycle drawing close to its end.  We do have concerns over the narrowness of the market, where the advance is, at present, led by a handful of tech stocks.  We continue to monitor market developments, and will act accordingly, on clients’ behalf.