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June 24, 2023 Market Update

U.S. stocks lost ground this past week as hawkish comments from members of the Federal Reserve, ongoing recession concerns, and high equity valuations combined to put Mr. Market in a defensive mood.

The S&P 500 Index retreated 1.4%, marking the first weekly decline since the first week of May.  The pullback threatens to end a rally that started back in mid-March.

International stocks also lost ground on fears that actions taken by overseas central banks to curtail inflation could ultimately trigger a global recession.  Vanguard Total International Stock ETF (VXUS), a broad measure of global shares outside the U.S., slumped 3.4% for the trading week through Friday’s close - the fund’s first weekly decline in the past four.

In testimony before Congress last week, Federal Reserve Chairman Jerome Powell said America’s central bank was likely to raise interest rates again in the coming months, albeit at a slower pace.  On Thursday, he told the Senate Banking Committee that if the economy stays robust, “it will be appropriate to raise rates again this year, and perhaps twice.”

Those comments helped keep the 2-year Treasury yield -- widely watched as a proxy for Fed policy expectations – near its highest level since early March at Friday’s close. 

The Wall Street Journal reported last week that interest in foreign stocks appears to be fading.  According to data from EPFR, global equity funds suffered their biggest weekly net outflow of assets since October 2022, based on numbers through June 14th.  

The net outflow in foreign equity funds aligns with weaker performance in non-U.S. shares vs. American stocks this year, based on ETFs that track broad-based indexes in both regions.  For example, Vanguard Total U.S. Market ETF (VTI) is up 13.3% year to date through Friday’s close, well ahead of its offshore equities counterpart (VXUS), which has seen a 7.8% gain in 2023.

Interest in companies seeking to capitalize on artificial intelligence’s potential to boost their bottom lines has been a leading cause for the resurgence of U.S. stocks.  Meanwhile, draft EU rules governing technology threaten to impose new restrictions on AI that could prevent the commercial use of artificial intelligence models (including natural language processing tools such as ChatGPT) in Europe.

Foreign economies have also been slower to recover from the adverse impact of the Covid 19 pandemic.  China has been one of the biggest laggards, with shrinking exports, fewer new housing projects, falling prices, and high levels of unemployment among young would-be workers all taking a toll.  No surprise, then, that the iShares MSCI China ETF (MCHI) is down 6.1% so far in 2023.

Not all international markets are struggling.  Stocks have been rallying in both Japan and Mexico, for instance.  An ETF representing equities in Mexico (EWW) has surged nearly 26% this year while an ETF proxy for shares in Japan (EWJ) has been keeping pace with the rally in U.S. stocks.

Meanwhile, the American equities market is holding on to most of its gains for the year despite the latest decline.  Upcoming inflation data, which in turn will influence the Fed’s upcoming decisions on rate hikes, will play a key role in determining whether the stock market rally resumes, or this past week’s negative trend dominates.  The next major release is due on July 12th, when the government publishes U.S. consumer inflation data for June.  Exactly two weeks later (July 26th), the Federal Reserve is set to announce its next decision for interest rates.  

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