Watch the CPK Market Action Report: June 2023
Ai pushed big cap tech stocks and some of the major indices even higher in May. Will the upward momentum spread to a wider breadth of stocks and or will a higher dollar and higher yields take their toll and ultimately reverse the upward trend for equities as a whole?
Watch the Market Action Report now:
Market Action Report
June 2023
INTRO TAG
Ai pushed big cap tech stocks and some of the major indices even higher in May. Will the upward momentum spread to a wider breadth of stocks and or will a higher dollar and higher yields take their toll and ultimately reverse the upward trend for equities as a whole?
That action starts now!
INDEX PERFORMANCE RECAP
The major indices were mixed this month with the Dow Jones Industrials closing down -3.54% while the S&P 500 was up .31% and the Nasdaq Composite up 5.94%. To help you grasp the magnitude of outperformance between the Nasdaq and Dow, there have only been eight other months in the Nasdaq’s history where it has outperformed the Dow like it did this last month.
EQUITY UPDATE
Over the past several months I and others have noted the very poor market breadth, meaning that the S&P 500 rally is mostly due to huge upswings in the larger weighted tech stocks, while the majority of the names in the S&P 500 are lagging. Put more clearly, only 5 of the 500 stocks (APPL, MSFT, NVDA, META and AMZN) represent nearly 80% of the YTD performance of the S&P 500. Absent these five stocks, the index would only be up around 2% for the year.
With these five stocks now above historical P/E ratios and approaching unattractive valuations, we are going to need a broadening out of the leadership for the S&P 500 to continue a rally towards 4300 or higher.
BOND UPDATE
Bonds yields were also higher this month with the 5yr settling at 3.74%, the 10yr at 3.63% and the 30yr 3.85%.
The yield curve of the Treasury market remains deeply inverted indicating a very high likelihood of a looming recession and that remains a concern for risk assets including stocks. With longer-dated yields more than a full percentage point below the fed funds rate and Treasury breakeven inflation expectations now pointing to price pressures retreating below the Fed’s 2% target in the coming years suggests a potentially sharp slowdown on the horizon.
The fact that the 2-year yield is threatening to fall to multi-month lows underscores that the market is beginning to believe the Fed regarding its plans to keep rates elevated in “restrictive territory” for some time. And because the effects of Fed policy are felt with such a lag, the longer rates stay at or above current levels, the more painful a looming recession is likely to be.
COMMODITY UPDATE
Soft Chinese Manufacturing PMI drove Crude sharply lower early in the month. Although it had a nice mid-month recovery, Powell’s cautious comments on the economy furthered the fears of a collapse in consumer demand due to uncertainties with the banking sector and worries of a looming deep and painful recession ultimately pushing the black gold back lower to close out at $68.09/bbl.
Copper suffered a steady decline for the same reasons as Crude did this month. Data out of China came in below estimates while data on our shores pointed to deterioration in the labor market and slowing growth. Copper dropped to a 6-month low at $3.63. There is a case for copper to hold in the $3.50 area for a while if the market is provided enough catalyst such as a dovish Fed, a better economic outlook and a debt ceiling deal which it looks like we are going to get.
After a brief rally that brought Gold within $5/oz of its all-time intraday high of $2,089/oz in 2020, the yellow brick was overcome by the pressure of higher rates and a strong US Dollar both of which could remain persistent for a while. Gold has been in a well-defined uptrend dating back to October and maintains trend support in the $1905 to $1,920 area.
CURRENCY UPDATE
With the US posting stronger economic data than international markets, the greenback was able to push through its previous resistance level of $103 and close at its highest level since mid-March at $104.23.
The dollar has made substantial progress at establishing a bottom in the 101 area in recent weeks. If we are on the brink of a new leg higher in the Dollar Index, expect that to become a renewed source of pressure on the broader U.S. equity market.
Looking back in time to the last few major bear markets in stocks, the dollar rallied meaningfully through the dot com bubble bursting, the Great Financial Crisis and the onset of the Covid pandemic. So, it is clear that keeping tabs on what the dollar is doing is a critical practice, especially during times when the yield curve is deeply inverted and indicating a high likelihood of recession.
The Dollar Index peaked and turned lower about two weeks before stocks bottomed out last October. Using a roughly similar timetable for stocks to react to current price action in the dollar, we could expect stocks to begin to feel the effects of a stronger dollar by the start of June.
ECONOMIC UPDATE
The FOMC raised rates another 25 basis points to 5.125% as expected. This is the first-time rates have been above 5% in more than 15 years. However, language in their speech was equivalent to them saying they are done hiking rates. Chari Powell did push back on any ideas of a rate curt later this year by saying that inflation will take some time to subside.
Economic reports largely came in as expected for the month and were more supportive of a soft economic landing. Although, weekly jobless claims have risen over the last few months from 200k to 250k. With layoffs continuing to come in, we should expect claims to continue drifting higher. However, any sudden spike toward or above 300k in the coming weeks would absolutely increase the odds of a hard landing.
THE WRAP
There’s no shortage of things that can go wrong with the economy and markets. A hard landing may occur. The Fed may keep hiking rates. Inflation may not decline. Earnings guidance may get cut. The debt ceiling may be breached.
In normal times and in normal markets, this formidable list of potential negatives would pressure stocks. But context matters, and after experiencing the worst year in the market since the financial crisis in 2022, and with the S&P 500 still nearly 20% below the all-time highs, in 2023 the market has adopted a “show me” state of mind. Put more bluntly, all those risks mentioned above may happen, but until it looks like they actually will, the combination of the 2022 drop in stocks and a continued broad expectation of calamity by the majority of investors is combining to support markets, as the news simply isn’t bad enough, yet, to cause material selling.
However, as I’ve learned very clearly during my twenty-year tenure in this business, just because something bad hasn’t happened yet, it doesn’t mean it won’t.
While I believe that AI has great potential and it does appear to be the “next big thing” I don’t see how it can offset the reality of higher interest rates and more pressure on the economy, at least not for a sustainable period.
The net result, I believe, is that we must respect this market’s resilient nature by staying long, but we must do so by controlling downside exposure with a short-term income producing hedge.
CPK FOCUS
For the month of June, 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, Europe Developed and Latin America.
As for Domestic Equities, our focus is on Mid Cap Blend and Mid Cap Value with an emphasis in the Technology, Industrial, Non-Consumer Cyclical and Basic Material 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 June 2023 Market Action Report. Thanks for joining me. It’s time for me to get back to the markets.
And that action starts, NOW!