June proved to be a hot month for all major stock markets. Market optimism during the month was fueled by the Fed's decision to hold off on additional rate hikes and softer-than-expected inflation data. Thanks to continued strength from several mega-cap tech stocks like Apple, the S&P 500 finished the month 6.6% higher.
• Positive performance in six of the last seven weeks of the quarter.
• Up 8.7% in the second quarter.
• Rose 16.9% in the first half of the year, marking the best first half since 2019.
Apple continued to dominate headlines in the final trading day of the month as it was the first company to ever close above a $3 trillion valuation. Despite the dominating comeback of tech stocks this year, the rally in June broadened. Every stock industry sector in the S&P posted positive returns for the month. Foreign and emerging market stocks were up 4.6% and 3.9%, respectively. Small and mid-sized domestic companies also performed well, up 8.2% and 9.2% in June. Despite the “risk on” nature of the stock market, the bond market continues to diverge in sentiment.
Fixed income yields continued to move higher even with the debt ceiling deal being reached on the first day of June. With rates moving higher, the bond market index finished the month slightly lower, down -0.36%. Treasury rates followed suit as the 10-year yield finished at 3.81%, up from 3.64%. Meanwhile, most short-term rates remain well above 5%. The continued inversion of these rates has the bond market signaling that a recession is looming.
With the bond market calling for a recession and the stock market shrugging off any concerns, the economic data is equally mixed. The Core PCE - the Fed’s preferred inflation gauge - came in under expectations, showing moderate inflation. The labor market continues to remain hot with unemployment at levels not seen in decades. The economy has slowed, but has avoided the widely anticipated recession.
The Fed’s decision to hold off in June ended a streak of ten consecutive rate hikes that quickly resulted in the Fed Funds Rate go from 0% to 5.00-5.25%. Even with the pause, Chair Powell hinted that two more rate hikes are in the cards, beginning in July. It seems the Fed may be equally baffled by the mixed signals in the economic data.
Time will tell how this scenario plays out in the back half of the year. Worth noting, July has been the best month of the year for the S&P 500 with an average monthly gain of 2.4%, and positive returns since 2014. In the meantime, take a bite of the free lunch the market has offered with 5% yields in treasuries and money markets and enjoy the summer.