June 2023 Monthly Market Review

Despite ongoing concerns about the prospects for global growth, risk assets delivered positive results in June.  U.S. equities continued to rally with a notable broadening of contributors to returns compared to May.  Non-U.S. equities, both in developed and developing markets, also posted gains and benefited from a weaker U.S. dollar (USD).  Fixed income markets were mixed.  Rising rates and a twist in the curve were headwinds for Treasury strategies, but segments like high yield and floating rate loans shrugged off rate moves and rose higher with equity markets.  Several categories of real assets also performed well as near-term inflation expectations increased and a generally positive macro backdrop helped various segments rise.

For the first time in the current tightening cycle, the Fed did not raise rates, preferring to pause and assess the impact of the sharp rise in interest rates.  However, there was broad agreement among the Federal Open Market Committee (FOMC) members that its work to reduce inflation is not yet complete and that two more hikes are expected in 2023.  The European Central Bank (ECB) also remained firm in its fight against inflation as was the Bank of England (BOE), which surprised markets with a larger-then-expected 50 bps rate hike.

Domestic equity markets posted their fourth consecutive month of gains in June.  The S&P 500 advanced 6.6% while the broader Russell 3000 Index returned 6.8%. By June 8th, the S&P 500 had rallied over 20% from its October 12th low, marking the start of a new bull market.  The previous bear market lasted 282 days (January 3, 2022 to October 12, 2022) and resulted in a 25.4% drawdown.  By comparison, since 1950, the average bear market lasted for 351 days and resulted in a 33% drawdown.

With investors optimistic about the prospects of a soft landing, a broader array of companies joined in the market rally.  Market leadership rotated away from large tech and tech-adjacent stocks and toward economically sensitive sectors in June.  Industrials (+12.0%) was the best performing sector, followed closely by consumer discretionary (+11.9%) and materials (+11.0%).  Meanwhile, defensive utilities (+1.4%) and consumer staples (+3.4%) lagged.

Performance among the mega cap tech stocks diverged.  Tesla (+30.1%) posted strong gains in June, providing a tailwind for the broader consumer discretionary sector, while Alphabet (−2.9%) pulled back.  Apple’s 6.5% gain pushed the company’s market capitalization above $3 trillion for the first time; it currently exceeds the combined market cap of all the constituents in the Russell 2000 Index.

In a risk-on market environment, small caps outpaced their large cap counterparts.  The Russell 2000 Index gained 8.1% versus 6.8% for the Russell 1000 Index.  Growth (+6.9%) and value (+6.7%) stocks finished the month in line with one another, as measured by the Russell 3000 style indices.  Year-to-date, large caps continued to lead small caps (+16.7% vs. +8.1%) and growth stocks were well ahead of value stocks (+28.1% vs. +5.0%).

Foreign developed equities ( +4.6%) displayed similar strength as their domestic counterparts despite a mixed bag of economic data and further tightening from the ECB and BOE.  Manufacturing activity in the euro area (+6.5%) contracted further than expected as rate hikes appeared to take hold.  Despite signs of economic slowing, employment numbers remained strong and the performance of European corporates stable.  In the U.K. (+3.9%), inflation remained stubbornly high, which prompted more aggressive action from the BOE.  However, the economy remained surprisingly resilient.  Farther east, Japan’s Nikkei 225 was up another 7.6% in local currency terms and remains one of the best performing markets of 2023.  On whole, market participation was broad based for the month, as all developed countries and all major sectors finished in positive territory.

While many major developed economies continue to tighten, China (+4.0% USD) eased as its economy struggles to recover post-COVID.  The People’s Bank of China announced a 10 bps cut to the one-year loan prime rate to 3.6%  The five-year equivalent was also lowered from 4.3% to 4.2%.  The move was a signal that Beijing remains committed to economic growth, but investor confidence remained shaky as it fell short of expectations for a broader stimulus package.

Elsewhere in the developing world, Latin America was quietly the best performing region in the world.  With investor attention fixated on Asia, Brazil (+16.0%) and Argentina (+26.0%) posted double-digit gains against a backdrop of relative economic stability and promising growth.  Many Latin American countries acted early in combating inflation and are, in turn, ahead of many of the developed markets in hiking rates.  Despite the high rate environment, Brazil outperformed first quarter growth forecasts and subsequently raised projections through the remainder of the year.

As mentioned at the outset, rates—outside of a drop in 30-year Treasury yields—rose during the month with the biggest increase in the 2-year and 5-year maturity tenors.  These changes impacted the current level of inversion along the yield curve,  The 2s10s spread (the difference between the 10-year and 2-year Treasury yields) fell to −100 bps, which approached the deepest inversion that occurred during this tightening cycle (−108 bps).  Meanwhile, the 5s30s spread (the difference between the 30-year and 5-year Treasury yields) moved from 11 bps at the end of May to −17 bps at the end of June.  These movements led to negative returns across short- and intermediate-term Treasuries while 90-day T-bills and long-term Treasuries both delivered positive—and comparable—performance.

Credit spreads generally absorbed the increase of rising rates, but the impact on performance was mixed.  Investment-grade corporate bonds produced modestly positive performance, but lagged their high yield bond counterparts.  Within the below investment-grade space, the prospect of more rate hikes helped floating rate loans outperform high yield bonds.

Real assets were mostly positive in June.  Global REITs gained 3.2%, buoyed by strong returns in the U.S. (+5.0%) as rates held steady and the macroeconomic picture improved. The regional mall subsector rallied 11.7%, with stronger than expected retail sales in May.

The office sector (+10.4%), which has been reeling from work-from-home trends and increasing defaults across major U.S. cities, also rebounded.  Office REITs benefited from an improved economic backdrop and the announcement that office REIT SL Green sold a large office investment to a private buyer for a steep premium relative to current valuations.  Despite the recent rise, office REITs remain down by 16.2%, year to date through June while overall domestic REITs are up 3.0% over the same period.  European and Asian REITs were relatively unchanged in June, while the U.K. declined by 4.6% on expectations for continued rate hikes through mid-2024.

Natural gas prices rose by 33% in June due to warmer than expected weather and forecasts for strong cooling demand during July. Despite the monthly increase, prices are down 57.2% over the trailing one-year period due to a warmer 2022-23 winter, stronger U.S. production, and constrained liquefied natural gas demand.  Crude increased modestly on additional production cuts from Saudi Arabia and Chinese stimulus measures that may boost demand. North American natural resource equities were up 7.4% on the higher oil & gas prices.

The economic stimulus measures by China led to optimism regarding the demand for commodities, which were up 4.0% for the month, led by the energy subindex (8.4%).  Livestock commodities increased by 9.8% as beef production continued to decline.  One-third of the High Plains and two-thirds of the Midwest are in a moderate drought, which has threatened grain production and caused agriculture commodities to increase by 5.1%.  Elsewhere, global infrastructure (3.0%) and MLPs (4.1%) posted positive returns for the month as interest rates moderated and the economic outlook appeared to improve.

Indices referenced are unmanaged and cannot be invested in directly.  Index returns do not reflect any investment management fees or transaction expenses. This report is intended for informational purposes only; it does not constitute an offer, nor does it invite anyone to make an offer to buy or sell securities.  Information herein has been obtained from third-party sources that are believed to be reliable; however, the accuracy of the data is not guaranteed and may not have been independently verified. The content of this report is current as of the date indicated and is subject to change without notice.  It does not take into account the specific investment objectives, financial situations, or needs of individual or institutional investors.   All commentary contained within is the opinion of Prime Buchholz and intended solely for our clients. Unless otherwise noted, FactSet was the source for data used in this report. Some statements in this report that are not historical facts are forward-looking statements based on current expectations of future events and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements. Past performance is not an indication of future results.