Watch the CPK Market Action Report: July 2023
Stocks moved higher once again for the month while the bond market continues to signal that additional rate hikes will cause an economic slowdown. Will the trend continue for equities or will higher rates for longer damper economic enthusiasm?
Watch the Market Action Report now:
Market Action Report
July 2023
INTRO TAG
Stocks moved higher once again for the month while the bond market continues to signal that additional rate hikes will cause an economic slowdown. Will the trend continue for equities or will higher rates for longer damper economic enthusiasm?
That action starts now!
INDEX PERFORMANCE RECAP
The major indices all closed higher with the Dow Jones Industrials closing up 4.49% and the S&P 500 up 6.39%. The Nasdaq Composite was up 6.52% as well. While these gains are quite impressive, many are wondering what catalyst could possibly push the overstretched markets even higher.
EQUITY UPDATE
Clearly tech outperformed in the first half of 2023. In June, Value stocks, the S&P 500 Equal Weight and Cyclical Sectors, closed that performance gap modestly. As we start the second half of 2023, those areas of the market have momentum and if data stays resilient, we believe they can continue to outperform.
However, this puts a lot of pressure on economic data to not just be stable, but strong, as surging rates will hit stocks if data doesn’t consistently point towards an economic reacceleration.
BOND UPDATE
Bonds yields were all higher this month with the short end of the curve seeing the bigger increase. The 5yr settled at 4.13%, the 10yr at 3.81% and the 30yr 3.85%. The 10s-2s yield spread remains at -100 bps.
Bonds remain the most consistent assets class out there, as their message on a looming economic slowdown has not changed, and it’s only become louder in the last few weeks. So far in 2023, stocks have been right, but bonds have a better longer-term track record.
COMMODITY UPDATE
WTI Crude was choppy all month and closed out almost flat at $70.45/bbl.
Like most assets, right now oil is beholden to the economy. If a soft landing (or even no landing) occurs, then that will be a solid tailwind on oil and other industrial commodities and country oversupply fears. If a hard landing looks more likely in 2H ’23, then a sharp drop in oil isn’t out of the question given oversupply concerns, especially from Russia (who is pumping as much as they can to fund the war).
Copper pushed over $3.90 early in the month, recovering from its recent 52 week low. However, by month end it had retraced that move to close slightly higher for the month at $3.74/oz. The outlook for copper remains bearish and that won’t change until we get a less hawkish shift in Fed policy expectations.
Gold continued its slide towards support at $1,900/oz closing out at $1921.10/oz. As the Fed has become more hawkish (again) and inflation has declined, we’ve seen gold pull back solidly from the 2023 highs. As such, $1,900 is now an important support level that simply must hold for the gold bulls. Assuming that support holds, gold will need one of the following to resume the rally: A bounce back in inflation, a material drop in the dollar, or a sustainable uptick in geopolitical angst. If support at $1,900 doesn’t hold, and we don’t get any of the previously mentioned events, then a drop to the mid $1,800s (or worse) should be expected.
CURRENCY UPDATE
The US Dollar was able to bounce back a little from its selloff in the first half of the month to close out at $102.58. The greenback remains largely rangebound around 103 and will most likely stay that way until economic data gives us more clarity on soft vs. hard landing and/or the Fed confirms whether we’re getting two additional rate hikes (or more).
ECONOMIC UPDATE
The labor market remains impressively resilient according to the latest claims data, as the multi-week pop in claims that implied the labor market was weakened was soundly reversed.
Specifically, claims dropped to a multi-week low and there were no special “reasons” listed by the Department of Labor for the drop, so we should take this is legitimate data.
The drop in claims sent both cyclical stocks and Treasury yields surging, because if the Fed is focused on returning balance to the labor market, then this number will increase the likelihood of two rate hikes in near future as Powell mentioned in his speech.
THE WRAP
While the stock market has been extremely resilient this year, a continued move higher for stocks will require absolute perfection in all economic reports. Any miss could easily open the door to an air pocket that drops stocks 10% or even more. I am also not convinced that the equity market has priced in two more rate hikes or the real possibility of the Fed not cutting rates later this year. Although this is my opinion, the message of the bond market has been very consistently telling us there are looming issues ahead.
CPK FOCUS
For the month of July, the cash allocation in our equity models remains at 40% due to the model’s more aggressive nature.
Our broad focus is on International and Domestic Equities.
In International Equities, our focus is on Europe Emerging, Latin America and Europe Developed.
As for Domestic Equities, our focus is on Mid Cap Blend and Mid Cap Value with an emphasis in the Technology, Industrial, Basic Material, Non-Consumer Cyclical and Consumer Cyclical sectors.
CPK DISCLAIMER
As a reminder, my current allocation is not a recommendation. Regardless of what happens next, investors like you need to have a simple and yet solid financial plan that reduces RISKS, COSTS and TAXES while securing the necessary income you need to maintain your lifestyle throughout retirement.
If you don’t have a plan OR you’re not comfortable with the plan you have, call me today to get pointed in the right direction.
I’m Chad Kunc and that puts a wrap on the July 2023 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.
And that action starts, NOW!