August 2nd, 2023
Those that chose to ‘buy the dip’, ride the wave and endure the hardship of a down market in 2022 seem to have found themselves back in a flurry of positive returns and a growing investment portfolio.
Yet, this bull market has seemed somewhat illusive to the thoughtfully diversified, moderately-conservative, investor in the first several months of 2023. But how can that be when the S&P is up, year-to-date, nearly 20%?
Market returns have come from a concentration of the S&P’s top seven names, which make up a whopping 28% of the overall market cap of the index: Apple (AAPL), Microsoft (MSFT), Nvidia (NVDA), Google (GOOGL), Meta (META) , Amazon (AMZN) and Tesla (TSLA).
As you can see form the chart below, market returns in 2023 have largely come from three sectors: Technology, Consumer Services and Consumer Discretionary.
Looking at the returns from June it appears the rally has begun to extend beyond the mega-caps with market breadth having improved tremendously. The result was, June, having the best returning month for the S&P 500 year-to-date.
I’ve said in early posts this year that for the market to break out to a sustainable bull run, participation would need to broaden out beyond the mega-cap stocks and into other sectors and market caps – that seems to be happening now.
With this positive development, we now look beyond the S&P 500’s large cap holdings and towards the smaller market cap names in the mid and small cap indices. Below is a chart of the SPDR S&P 500 ETF (SPY, Blue Line) compared to the Vanguard Mid (VO, Red Line) and Small Cap (VB, Green Line) ETFs. We can see that SPY has outpaced the Mid and Small caps in the first half of the year.
The two-month view, however, paints a different picture. SPY has continued to advance, but VO and VB have taken a leadership role for the time being, with accelerating momentum over the past several weeks. This expansion of market breadth into the mid and smallest market cap stocks is very encouraging as we look for signs of a sustainable bull market rally in the second half of the year.
And now, your Monthly Market & Economic Update by the numbers.
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Warmly,
Mark S Sauer
Market Update
Global Equities: July ended with another strong month. The S&P 500 closed with a total gain of 3.27%. The Dow Jones Industrial Average ended with a 3.35% gain. The Nasdaq Composite ended 3.39% higher to lead the major domestic large cap indices as big tech earnings were mostly positive. Developed International stocks gained 3.14% while Emerging Markets sharply outperformed with a 5.88% gain.
Economic Update
Retail Sales Soften: The consumer has been the driving force behind continued economic growth that has befuddled Wall Street forecasters, but slowing Retail Sales data may hint at an impending slowdown. June Retail Sales came in lighter than expected at 0.2%, compared to estimates of 0.5%. May results were revised from 0.3% to 0.5%. Anecdotal comments from American Express (AXP) during the company’s second quarter earnings call suggest the consumer still has ammo left, however, AXP Chief Financial Officer Jeff Campbell noted the company did not see “any signs of weakness on travel and entertainment habits.”
Charts of the Month
PCE
Our first chart looks at the Core Personal Consumption Expenditure Index (Core PCE) measured over one-year, six-month, and three-month timeframes. All three measures show that inflation is gradually moving towards the Fed’s 2% target. The Fed gives most weight to the recent data, which encouragingly is declining at the fastest pace as shown by the light blue three-month line. The Fed does not project inflation will hit 2% until 2025, so we still have a ways to go, but the data is clearly trending in the right direction.
Leading Economic Indicators
Our next chart is the annual growth rate of the Leading Economic Indicators (LEI) Index from The Conference Board. LEI is commonly cited as an early indicator of impending recessions, and the June data showed a 15th consecutive monthly decline, suggesting a recession on the horizon. Interestingly, the LEI release coincided with a research note from Goldman Sachs stating the investment bank downgraded its recession probability from 25% to 20%. Strong consumer spending and full employment has kept US GDP above 2%, defying expectations thus far, but the LEI is worth watching and may be signaling economic weakness on the horizon for 2024.
PPI & CPI
Our final chart shows the five-year path of annualized Producer Price Index (PPI, blue line) and Consumer Price Index (CPI, red line) data. The soaring inflation in PPI was largely attributed to supply chain bottlenecks which have now mostly resolved. As a result, PPI inflation has fallen sharply to near zero. CPI has yet to fully recover, however, due to the lagging effect of those raw input prices working their way through the manufacturing process. The higher CPI is also likely due to corporate pressure to maintain higher profit margins and avoid passing through the lower costs to consumers, who have thus far continued to spend freely.
