Monthly Market Update - June 2023

Highlights:

• The S&P 500 Index continued its advance in May, but with only eight companies contributing most of the advance for the year.
• Congress relieved investor anxiety by passing debt ceiling legislation.
• Equity and fixed income markets continue to provide conflicting signals about the prospects of a recession.

While the headline news in May centered on the debt ceiling crisis, investors seemed to better read the tea leaves by largely ignoring the noise. By the end of the month, the resolution in Washington seemed to confirm the indifference, leaving the S&P 500® Index nearly flat for May with a 0.4% advance, making for a 9.7% gain year-to-date. Despite some volatility in short-term notes, the bond market also largely shrugged off the possibility of default. Of more import to investors was the disposition of the Federal Reserve, with futures leaning for another rate hike in June while still anticipating rate cuts before the end of the year.

In the meantime, we continue to see rifts in the economy caused in part by sticky inflation and in part by the sharpest Federal Reserve rate increases in history. In previous months, we discussed the results on a small number of leveraged banks. These overall stresses have contributed to a sharp disparity of returns. In May, just three S&P sectors were positive, with an outsized return for Technology followed by Communication Services and Consumer Discretionary, while value and defensive indices were negative. Smaller stocks, generally considered to be more economically sensitive, were also negative in May. Signs that the overall economy is beginning to stutter included a slowdown in bank lending, a continuing contraction of the money supply, and recent reports that manufacturing orders are down.

From our perspective, the most important aspect of the stock market in May and the year, in general, has been the continued narrowness of the advances. A handful of large technology firms have been the main drivers of the gains, most recently behind the frenzy over AI (Artificial Intelligence). The equal-weighted S&P 500 dropped -3.8% in May, with a year-to-date return of -0.6%. Just five stocks were responsible for 85% of the Index's 9.6% gain through May. This makes the current market the narrowest since the Nifty Fifty era in the early 1970s and is reminiscent of the more recent tech boom of the late 1990s into 2000. Both cases signaled high risk and potential trouble for investors overly concentrated in the market's darlings. This may prove to be a largely overlooked risk for index investors as well.

In this month’s Q&A, Patrick Ryan, Head of Multi-Asset Solutions, the state of the markets and where he is finding opportunities amidst an S&P 500® that is humming along, the Fed continuing to wrestle with inflation, and the Ukrainian-Russian war raging on.