BY: RYAN P. JOHNSON, CFA, CFP® - MANAGING DIRECTOR OF INVESTMENTS
Often, a stock market pullback is a description of a 5% decline, a correction is a 10% decline, and a bear market is a decline of 20% of more. For the S&P 500, the bear market has officially ended. The market is still below the all-time closing high from January 3, 2022, but it is more than 20% above the closing low from October 12, 2022. This was the longest bear market in over a decade. Stocks have gained recently as concerns about the debt ceiling and concerns about the Fed have eased. A new bull market is upon us.
Volatility has dropped to the lowest level since before COVID. As we mentioned last month, the stock market rally has been led by Technology and Tech-adjacent stocks this year, which was the opposite of 2022. This is an example of the importance of diversification, as stock leadership can change quickly. From the 10/12/22 closing low, the S&P 500 gained 11.8%, 11.9%, and 15.4%, respectively, in the ensuing 1-, 3-, and 6-month periods. This is yet another example of why timing the market is quite difficult. Time in the market, not timing the market, is paramount to long-term growth and success.
The Federal Reserve did not raise interest rates on June 14th. This pause was the first time rates were unchanged after 10 straight hikes since March of last year, which saw short-term rates increase by a total of 5%. The Fed kept the door open for future rate hikes in case inflation is too high, with the next announcement set for July 26th. 3-month Treasury yields declined after the report (recently 5.06%, below the Fed Funds rate of 5.08%), perhaps indicating the bond market does not believe the Fed will raise rates any further. Recent readings of producer and consumer-level inflation continued a downward trend and it seems likely that inflation will continue to decelerate, as year-over-year comparisons become easier.
Due to higher interest rates, the goods/manufacturing sector of the economy remains in contraction. The larger services sector remains in growth territory so far. The most recent monthly jobs report was strong, showing 339k jobs were added in May, though the unemployment rate did increase from 3.4% to 3.7%. Economists were surprised once again, as this was the 14th straight month that the jobs added were higher than the average economist estimate. The price of oil, recently near $70 per barrel, has continued to fade this year, which has helped inflation readings. In June of 2022, oil briefly traded over $120 per barrel.
Purchased money market funds to hold cash for short-term needs are yielding over 4.5%. With the Fed's current posturing, 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. Unlike last year's general bond market losses, this year bonds have generated a total return of about 2%. Total return can come from yield and/or from the changes in interest rates. Remember, bond yields and bond prices move in opposite directions, like a see-saw. Since the start of the year, yields on 2-year Treasuries have increased from 4.4% to 4.6%, while yields on 5-year Treasuries declined slightly to 3.9%. Yields on 10-year Treasuries have also declined, recently yielding around 3.7%. Short-term investment-grade corporate bonds, what we tend to favor in our bond portfolios, are still yielding north of 5%.
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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.