Economic Update 6-12-2023 

• In a light week for economic data, ISM non-manufacturing fell back but continued on a path of expansion. Jobless claims were mixed, with possible continued effects from seasonal adjustments. 
• Equities gained across the board last week, as sentiment continued in a positive direction. Investment-grade bonds fell back, as yields ticked higher, with foreign bonds seeing gains from a weaker dollar. Commodities were mixed, with crude oil falling back, as production cuts were offset by economic growth concerns. 

U.S. stocks earned minor gains last week, with little economic news but enthusiasm over the potential benefits of AI as well as an expected pause by the Fed next week seemingly leading the mildly positive sentiment. By sector, stocks were dominated by gains in consumer discretionary (due to Tesla), utilities, energy, and industrials; laggards included negative returns for technology and consumer staples. In tech, there was some interest in the eagerly anticipated Apple mixed reality headset (with a price tag of up to $3,500). Then again, as with AI, the near-term economic growth benefits don’t seem obvious, and price reaction was neutral on net. 

With the U.S. debt ceiling suspension now in the rear-view mirror, the focus has turned back to economic growth, earnings (with Q2 season starting in a month), inflation, and the Fed’s path. Technically, the S&P is now up 20% from its October low, while strategists debate whether this is the beginning of a new bull market, or merely a bear market rally within the prior cycle. Such distinctions are often unclear, and arbitrary definitions probably don’t really matter. In addition, the narrow leadership of the rally in tech-related stocks has some investors concerned, although bull markets and other rallies in the past haven’t necessarily required broad leadership (at first, at least). In fact, the five largest S&P 500 firms (Apple, Microsoft, Amazon, Alphabet, and Nvidia) now comprise nearly 25% of the index’s market cap—with the small group up over 45% year-to-date, and remaining 495 stocks up only 5%. Small caps have also rallied this month, which demonstrates signs of improved breadth, and indicative of investors recognizing their lowest relative valuation vs. large caps in years. 

The World Bank, in their Global Economic Prospects document, downgraded global growth by a percent from 3.1% in 2022 to 2.1% this year, with a small recovery to 2.4% in 2024 and 3.0% in 2025. For the U.S. specifically, 2022 growth of 2.1% is being downgraded to 1.1% and 0.8% for 2023 and 2024, with 2.3% expected for 2025. 

Foreign stocks were minimally higher in developed markets, as gains in the U.K. and Japan were offset by negative returns in Europe, prior to central bank meetings where rate hikes were again expected. At the same time, the eurozone technically entered recession, as the economy shrank by -0.1% in both Q1-2023 and Q4-2022. Emerging markets were the best performers in the world last week, with gains in Brazil, Mexico, and South Africa in the mid-single digits. 

Bonds fell back slightly as interest rates ticked higher across the yield curve, with treasuries outperforming investment-grade corporates. High yield and floating rate bank loans bucked the broader market with gains. Foreign bonds in both developed and emerging markets rose along with a drop in the dollar. Both Canada and Australia hiked rates again last week after a multi-month pause, which seemed to raise awareness of the same possible path for the U.S. Fed. 

Commodities featured gains in industrial and precious metals, while energy and agriculture saw declines. Crude oil fell over-2% last week to $70/barrel, offset a bit by a rebound in natural gas. Over the prior weekend, a decision by Saudi Arabia (acting outside of OPEC+) to cut production by 1 mil. barrels/day starting next month resulted in a crude oil price rise of several percent Monday morning. However, continued worries over slower economic growth kept a lid on gains, as did speculation about a renewed U.S.-Iran nuclear deal (which would allow Iran to ramp up production). Wheat and corn prices temporarily rose with the collapse of a dam in Ukraine, but fell back sharply by the end of the week, with little effect in U.S. markets. 

Period ending 6/9/2023	1 Week %	YTD %
DJIA	0.36	3.26
S&P 500	0.41	12.82
NASDAQ	0.15	27.20
Russell 2000	1.92	6.63
MSCI-EAFE	0.64	10.46
MSCI-EM	1.89	5.77
Bloomberg U.S. Aggregate	-0.15	2.01

 

U.S. Treasury Yields	3 Mo.	2 Yr.	5 Yr.	10 Yr.	30 Yr.
12/31/2022	4.42	4.41	3.99	3.88	3.97
6/2/2023	5.50	4.50	3.84	3.69	3.88
6/9/2023	5.37	4.59	3.92	3.75	3.89

Sources:  LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research.  Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends.  Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.                                                                                    

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness.  All information and opinions expressed are subject to change without notice.  Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.