June 17, 2023 Market Update

Stocks posted strong gains last week as investors took comfort in the Federal Reserve’s decision not to raise its policy interest rate at its meeting last week (discussed further below).   Excitement over the business prospects for artificial intelligence -- for the tech industry and beyond -- added to the bullish sentiment.  Microsoft’s stock (MSFT), for example, soared 4.8% last week and closed just below a record high.

Unlike earlier in the year, last week’s market gains were not limited to mega-cap tech stocks.  For example, an ETF that tracks an equally-weighted version of the S&P 500 – Invesco S&P 500 Equal Weight ETF (RSP) -- rose 2.5% last week.  The fund’s third-straight weekly gain suggests that the rally in equities is broadening beyond the market’s biggest names.

The case for investing in bonds is also growing.  The 10-year U.S. Treasury Note, for example, yields 3.77% as of Friday’s close -- near the highest level since 2007.  By comparison, the estimated S&P 500 dividend yield is currently 1.54%, which is about as low as it has been in over 20 years.

As noted above, the Federal Reserve’s Open Market Committee left interest rates unchanged last week.  That was the first time the central bank did not raise rates at a policy meeting since the current hiking cycle began in March 2022. 

Following the decision, Fed Chairman Jerome Powell made it clear that the pause may be temporary and that he expects two more rounds of quarter-point rate hikes by the end of the year.  He also took a 2023 rate cut off the table.

The reason the central bank is not done pushing interest rates higher stems from stubbornly high prices.   The Labor Department reported Tuesday that the overall inflation rate slowed in May, but underlying inflationary pressures remain too strong to convince the Fed to end, much less reverse, its rate hikes. 

The consumer-price index rose 0.1% from April, lowering the 12-month change to 4.0%, from 4.9% in April.  So-called core consumer prices, which excludes volatile food and energy categories, however, climbed 0.4% in May and by 5.3% from a year earlier – still well above the Fed’s 2% inflation target.

Higher prices do not seem to be slowing consumer demand, according to the most recent data from the Commerce Department.  U.S. retail sales unexpectedly rose 0.3% in May, following a 0.4% increase in April.  Compared with the year-ago level, retail spending increased 1.6%, marking the first uptick in the year-over-year pace since January.

Given the foregoing, the decision to not hike rates this month was likely driven by concerns about the negative impact that past rate hikes have had on the financial stability on America’s regional banks.  That said, I think it’s premature to anticipate the end of the Fed’s tight money policy until there are clearer signs that inflation is moving closer to the Fed’s 2% target and that America’s red-hot jobs market, and our economy generally, have started to cool.

That’s all for now.  Have a great weekend, and invest wisely my friends.