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It’s not exactly a stealth rally – it’s been in the news – but the strength and persistence of the stock market’s performance coming off the lows of last October have continued to surprise. But it’s not without its critics; ongoing predictions of recession and a seemingly relentless rise in interest rates have belied this surprising rebound.
Amid this rally, a small cohort of mega-cap technology shares have led the way, driven by A.I.-fueled hype and perceived balance sheet strength. The Nasdaq, where many of these stocks reside, had its best first half since 1983, and the S&P rose 6.5% in June alone while the Dow tacked on 4.6% (CNBC, June 30).
The poster child for this recent surge has been Nvidia, which became the seventh US company to reach the $1 trillion valuation threshold at mid-month, based on its strength in A.I. (WSJ, June 13). While the commercial applications and economics of A.I. are unknown, it has certainly captured the attention of a broad range of companies and sectors and, it could be argued, will have far-reaching implications for the future workforce and company business models.
The skeptics have been busy, too, contributing to a significant rise in short positions to start the month, with The Wall Street Journal reporting that hedge funds and other speculators had built up “their most bearish positioning since 2007” (WSJ, June 4). That same story noted the extreme narrowness of the rally; the S&P, up 12% at the time, would have been negative absent the return of seven mega-cap tech stocks.
Those betting against the market continued to keep an eye out for signs of an economic contraction that, for the most part, was nowhere to be seen. Jobs numbers again surprised on the upside, with 339,000 positions added in May (WSJ, June 4). Consumer spending remained strong, helping to drive a 2.0% rise in 1Q GDP (CNBC, June 29). Inflationary pressures continued to moderate, with the consumer price index (CPI) up 4.0% in May year-over-year, well off its 9.1% peak and down from 4.9% the month before (WSJ, June 13).
Fed sits tight
As signaled, the Federal Reserve stayed on the sidelines in June, keeping the Fed funds rate in the range of 5.0% to 5.25% following 10 consecutive increases. Chairman Powell was nonetheless quick to say that the central bank was likely to raise rates again going forward, and 12 of 18 Fed officials concurred, collectively indicating a 2023 end point of between 5.5% and 5.75% – or higher (WSJ, June 14). (Of course, these kinds of projections are subject to change; see March, when most officials expected no further rises to the Fed funds rate.)
Regardless of all this, the S&P entered a new bull market (defined as a rise of 20% or more off a market bottom) on June 8, drawing the curtain on what had been the longest-running bear market since the 1948, according to Dow Jones Market Data (WSJ, June 8). While it’s worth noting that this post-Covid period has been one defined by a number of historical anomalies, this has generally been a good sign for stocks. Going back to the 1950s, the S&P 500 has climbed 92% of the time over the 12 months since starting a new bull market, with an average return of 19.0%, per The Wall Street Journal, citing Bank of America Global Research (WSJ, June 13).
Europe and China struggle
European economies continued to struggle to gain footing, with weakness in Germany helping to drag the Eurozone into recession (WSJ, June 8). The region’s GDP fell -0.4% in 1Q, following a decline in 4Q 2022, meeting the official definition of a recession.
In contrast to Europe and the U.S., China appeared to be grappling with falling price levels. Credit growth declined and the world’s second-largest economy lowered two key interest rates in response. This slowdown represented a departure from 1Q performance, which showed a return to solid growth as Covid restrictions eased (WSJ, June 9). In addition to the shift in monetary policy, new spending initiatives were planned to address the challenges of falling exports and the ongoing struggles of the property market (WSJ, June 15).
To sum up
For both the month and the year’s first half, the U.S. economy and the markets again surprised, mostly to the upside, as inflation pressures slowly receded. Fed policy continued to weigh heavily, however. Though it is almost certainly close to the end of this tightening cycle, volatility is likely to continue as recession fears linger and investors grapple with an uncertain interest rate environment.
Related: Rates Up, Dollar Down, Stocks Flat