BY: RYAN P. JOHNSON, CFA, CFP® - MANAGING DIRECTOR OF INVESTMENTS
Stocks have continued to rise but remain just shy of all-time highs. Many would be surprised to learn that earlier this month, the S&P 500 was just 3% from all-time highs when including dividends. Purely looking at price, the index was just 5% from highs. The third year of a Presidential election cycle has historically been the strongest for stocks, though the third quarter of that year (current quarter) has averaged a small loss.
The Technology-driven rally continued into July, though most companies have not yet reported second quarter results. We are keeping a close eye on earnings reports not only for the past results, but also for the forecasts for the remainder of 2023. So far, the rate of earnings “surprises” has been typical, but the rate of sales “surprises” has been below average. It is forecast that Q2 will be the third straight quarter of year-over-year earnings declines for the S&P 500. What could seem strange is the market lows came roughly 9 months ago, giving yet another example of how stock prices can move quite differently from earnings, or even the economy, over short periods of time.
Inflation continues to moderate, which is good for both stocks and bonds. The recent level of consumer inflation (CPI) was 3.0%, while producer inflation (PPI) was 0.1%, both better than expected and better than the prior month’s reading. Recent economic reports have slowed, though jobs remain strong, and the services sector of the economy continues to grow. As more of the year goes by with slow growth, the yield curve staying highly inverted, and with jobs remaining strong, any forecasts for a (mild) recession are getting pushed into 2024.
The Federal Reserve did not raise interest rates on June 14th, but they are expected to raise rates again on July 26th. The new target range of 5.25-5.50% will be the highest (most restrictive) level in many years: the 2006/07 peak was 5.25% and the 2000/01 peak was 6.25%. As of this writing, the futures market does not expect any changes to the Fed Funds rate for the rest of the year.
From a month ago, Treasury yields are generally just a bit higher, though they did rise and fall in the interim. With the Fed “talking tough” about two more rate hikes this year, Treasury yields were rising. However, once the tame inflation reports were out, yields retreated as market participants doubted the need for both rate hikes the Fed was forecasting. By August, we expect 5% yields on purchased money market funds to hold cash for short-term needs. We expect short-term rates for cash to remain high for the rest of the year. If you are not receiving a competitive interest rate on your cash, please contact us for suggestions.
After significantly strengthening from two years ago through late 2022, the U.S. dollar seems to be entering a period where year-over-year comparisons may be mild. For international companies and stocks with higher international exposure (the Technology sector has the highest average of any sector, for example), the dollar moving from a headwind to neutral would be an incremental positive for those U.S.-based investors.
How is an investment rate of return calculated? As is the industry standard, we use the daily time-weighted return method, which limits the impact of inflows and outflows on performance calculations. This method calculates daily value changes, then adjusts for the timing and size of any contributions and withdrawals you made.
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Thank you for your continued trust and support.
Ryan P. Johnson, CFA, CFP®
Managing Director of Investments
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.