A little Financial Focus update first…This past quarter:
Recent Headlines: “General Mills’ Sales Fall Short of Forecasts, Natural Gas Prices Expected to Stay Low, The Fed Said the Biggest U.S. Lenders Remain Healthy, Ford to Lay Off 1,000 Contract and Salaried Workers, Volatility Lurks Below Surface of Rally”. . . . And yet, stocks quietly climbed through the first half of the year, finding the S&P 500 positive 14%. What’s been the driver for this increase? One reason is that the economy’s resilience has helped quell fears about a recession that dominated for much of last year, despite volatility.
Once again Wall Street proved adaptable during the second quarter, despite rising inflation, two interest rate hikes, and concerns about the debt ceiling. The economy remained relatively strong, despite predictions that it may be headed toward a recession. (Read the first paragraph again.)
The second quarter saw information technology, communication services, and consumer discretionary account for most of the market gains. Energy, utilities, health care, financials, and consumer staples, however, slid lower. The market's positive performance during the second quarter was buoyed by strength in the labor market, economic data that may be showing inflation is beginning to wane, and a better-than-expected first-quarter gross domestic product.
Government bond yields rose in the second quarter, with investors eyeing the relative strength of the economy as a reason to remain bullish on stocks. Each of the benchmark indexes listed here climbed higher in the second quarter, with the Nasdaq enjoying its third-best first half on record (!), a far cry from last year at this time, when the tech-heavy index was going through its second-worst six-month stretch.
The S&P 500 also enjoyed notable growth in the second quarter. The dollar inched higher while gold prices retreated in the second quarter. Notwithstanding a roughly 4% increase in June, crude oil prices declined for the fourth consecutive quarter, marking the longest losing streak since 1988. While indications seem to point to a more bullish outlook, crude oil supply continued to outpace demand, muting prices. OPEC+ cuts were offset by production increases from other sources, including the United States. The June 26 retail price for regular gasoline was $3.57 per gallon, $0.15 above the March price of $3.42 per gallon. However, gas prices are down $1.30 over the last 12 months.
April began the quarter with stocks posting modest gains from the previous month. The large caps of the Dow +2.5% and the S&P 500 +1.5% were bolstered by a rally over the last two days of the month. Among the market sectors in April, industrials underperformed, while communication services fared the best.
Stocks were mixed in May, with information technology and communication services pushing the Nasdaq up nearly 6%, while the Dow lost 3.5%. The S&P 500 inched up 0.3%, but the small caps of the Russell 2000 fell 1.1%. Like the previous month, relatively strong corporate earnings reports and encouraging inflation data helped keep investors in the market.
Then, along came June. June was a strong month for stocks, with each of the benchmark indexes listed here posting gains of between 4.6% and 8%. The Federal Reserve elected not to increase interest rates in June, opting instead to step back and assess additional information and its implications for monetary policy. While manufacturing slowed, business activity in the services sector expanded at the fastest rate since April 2022.
Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.
Latest Economic Reports
The Job Market: Employment rose by 339,000 in May from April, in line with an average monthly gain of 341,000 over the prior 12 months. In May, employment continued to trend upward in professional and business services, health care, government, construction, transportation and warehousing, and social assistance.
FOMC/interest rates: The Federal Open Market Committee maintained the federal funds target range rate at the current 5% to 5.25% in June. The Committee essentially decided to assess the effects of prior rate increases. However, the FOMC indicated that more rate hikes are likely, noting that inflation remained elevated, while economic activity expanded at a modest pace and job gains have been robust. The summary of economic projections has the federal funds rate at 5.6% in June from 5.1% in March, which suggests the fed interest rate will be increased by a half of a percents by the end of 2023.
GDP/budget: Economic growth slowed minimally in the first quarter, as gross domestic product increased 2%, according to the third and final estimate from the Bureau of Economic Analysis. GDP rose 2.6% in the fourth quarter. Consumer spending, as measured by personal consumption expenditures, rose 4.2% in the first quarter compared to a 1% increase in the fourth quarter. Consumer spending on long-lasting durable goods jumped 16.3% in the first quarter after decreasing 1.3% in the prior quarter. Spending on services rose 3.2%.
Inflation/consumer spending: According to the latest Personal Income and Outlays report, the personal consumption expenditures price index edged up 0.1% in May and +3.8% since May 2022. Since May 2022, consumer prices for food increased 5.8%, while energy prices declined 13.4%. Personal income rose 0.4% in May, 0.1% greater than the April increase. Disposable personal income increased 0.4% in May after advancing 0.3% in April. Consumer spending increased 0.1% in May, after rising 0.6% in the previous month.
CPI: The Consumer Price Index rose 0.1% in May after increasing 0.4% in April. Over the 12 months ended in May, the CPI advanced 4%, down from 4.9% for the year ended in April. Excluding food and energy prices, the CPI rose 0.4% in May and 5.3% over the last 12 months. Contributing to the May CPI advance were increases in prices for shelter (0.6%) and used cars and trucks (4.4%). In May, food prices increased 0.2% and 6.7% since May 2022. Energy prices fell 3.6% in May and are down 11.7% over the 12 months ended in May.
Housing: Sales of existing homes increased 0.2% in May. Since May 2022, existing-home sales dropped a whopping 12.7%. According to the report from the National Association of Realtors®, job gains, a dearth of inventory, and fluctuating mortgage rates have contributed to the decline in sales of existing homes. The median existing-home price was $396,100 in May, up from $385,900 in April but lower than the May 2022 price of $408,600. These numbers are a national average so do not typically reflect the housing market in California.
In May, unsold inventory of existing homes represented a three-month supply at the current sales pace, up from the April pace of 2.9 months. Sales of existing single-family homes dropped 0.3% in May and, notably, 20% from May 2022. The median existing single-family home price was $401,100 in May, up from the April price of $390,200 but well below the May 2022 price of $415,400.
New single-family home sales advanced in May, climbing 12.2%, marking the third consecutive monthly increase. Sales were up 20% from a year earlier. The median sales price of new single-family houses sold in May was $416,300. The May average sales price was $487,300. The inventory of new single-family homes for sale in May decreased to 6.7 months, down from 7.6 months in April.
Manufacturing: Industrial production declined 0.2% in May after increasing 0.5% the previous month. Manufacturing increased 0.1% in May, bolstered by 0.3% increase in durables, which was offset by a 0.1% decrease in nondurables. In May, mining fell 0.4%, while utilities dropped 1.8%. The decrease in mining was driven primarily by decreases in coal mining and support activities (in particular, oil and gas well drilling). The output of utilities declined for the second consecutive month, as electric utilities fell in May, while natural gas utilities remained unchanged.
Imports and exports: May saw both import and export prices decrease. Import prices fell 0.6%, following a 0.3% increase in April. Prices for imports declined 5.9% over the past year, the largest 12-month drop since the index declined 6.3% for the 12 months ended in May 2020.
Import fuel prices decreased 6.4% in May, following a 4.1% jump in April. The May decline in import fuel prices was the largest monthly drop since August 2022. Lower prices in May for nonfuel industrial supplies and materials and foods, feeds, and beverages more than offset higher prices for automotive vehicles and capital goods. Export prices fell 10.1% for the year ended in May, the largest 12-month decline since the series was first published in September 1984.
International markets: China's post-pandemic economic recovery showed new signs of weakness in June. Manufacturing in China contracted for the third straight month in June, while the services sector also weakened. The latest data likely prompted the Chinese government to lower the one-year loan prime rate by 10 basis points.
With inflationary pressures continuing to rise, the Bank of England hiked interest rates by one half a percent in June, marking the 13th consecutive interest rate increase. Elsewhere, in Germany, manufacturing declined in both goods and services sectors. What was often the fulcrum of the German economy, weak global demand has impacted German exports.
Consumer confidence: The Conference Board Consumer Confidence Index® increased in June to 109.7, up from a revised 102.5 in May. That’s a good sign. The Present Situation Index, based on consumers' assessment of current business and labor market conditions, rose to 155.3 in June, higher than the May reading of 148.9. That’s good too.
The Expectations Index, based on consumers' short-term outlook for income, business, and labor market conditions, advanced to 79.3 in June from 71.5 in May. According to the Conference Board's report, the Expectations Index has remained below 80.0, the level associated with a recession within the next year, since February 2022, except for a brief uptick in December 2022. However, June's reading was just a shade below 80.0 and up sharply from the prior month's rate.
Eye on the Quarter Ahead
During the third quarter, we and investors alike will certainly focus on inflation data and the Federal Reserve's response. Concerns over slowing economic activity, both here and globally, will also influence the market going forward. But, if the last two and a half years have shown us anything, it’s that once again, being diversified, being focused on the long term and taking headlines with a large grain of salt will generally win the day.
Though we can’t know the future – which stocks will rise and when, how interest rates will vary, whether real estate will boom or bust, what we can do is observe the past. Market volatility is simply a natural part of the market cycle. If one can embrace that concept, it gets a lot easier.
Your Financial Focus Team
Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). News items are based on reports from multiple commonly available international news sources (i.e., wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Forecasts are based on current conditions, subject to change, and may not come to pass. U.S. Treasury securities are guaranteed by the federal government as to the timely payment of principal and interest. The principal value of Treasury securities and other bonds fluctuates with market conditions. Bonds are subject to inflation, interest-rate, and credit risks. As interest rates rise, bond prices typically fall. A bond sold or redeemed prior to maturity may be subject to loss. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.
The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 largest, publicly traded companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. The U.S. Dollar Index is a geometrically weighted index of the value of the U.S. dollar relative to six foreign currencies. Market indexes listed are unmanaged and are not available for direct investment.