The Stock Market
Stocks finished a robust month by rallying on the last trading day, Friday, June 30th. That also capped a banner quarter and first half of 2023 for the markets.
For the month of June, the stock market’s three major indices performed as follows:
S&P 500 +6.5%
That was the best monthly performance since October 2022 for the S&P 500 and the fourth consecutive winning month for the Nasdaq.
For the second quarter of 2023, the three major indices performed as follows:
S&P 500 +8.3%
The Nasdaq has now posted back-to-back positive quarters, while the Dow and S&P have risen three consecutive quarters.
For the first half of 2023:
S&P 500 +15.9%
For the Nasdaq, the first half of 2023 was its best first half of any year since 1983, and the S&P 500 posted its best first half since 2019.
June’s Consumer Price Index revealed a smaller-than-expected rise in consumer prices. According to the U.S. Labor Department, the CPI increased only 0.1% in May, following April’s monthly 0.4% increase.
On a 12-month basis, the CPI rose just 4%, which was the smallest annual increase since March of 2021, and followed a 4.9% annual CPI increase in May.
Both monthly and annual CPI numbers came in better than economists had forecast, with an anticipated 0.2% monthly increase and a 4.1% annual increase.
For the month, gasoline prices (-5.6%) saw relief, while electricity prices and the Energy Index also fell (-3.6%), now for the third month in a row.
However, food prices trended higher (+0.2%) after two months of level price growth. Shelter prices (+0.6%), and the price for used cars and trucks also climbed.
Stripping away volatile housing and energy costs, core inflation rose 0.4% in May, and prices now sit 5.3% higher than one year ago.
Of course, the fact that inflation was inching lower toward the Fed’s target rate of 2% influenced the central bank’s decision not to raise rates just a day after the CPI report was released.
The Fed and Rates
At their June 14th meeting, Fed chairman Jerome Powell took the podium and announced that the central bank would pause their rate hike campaign – for now.
The Fed’s decision not to raise their benchmark interest rate comes after ten rate hikes in a row since January 2022 in an aggressive campaign to cool inflation.
U.S. consumer prices barely budged in May, with the smallest annual increase in prices in over two years. But the current pace of inflation is still double what the Fed has deemed a comfortable target of 2%.
So, the central bank remains hawkish on future rate increases if underlying price pressures don’t recede further. In fact, Fed policymakers are on record that we can expect one or possibly two more rate hikes in 2023 to further cool inflation.
In fact, Powell’s most recent statements on the prospects of two possible rate hikes in the second half of 2023 are particularly hawkish.
As of today, the Fed funds rate remains at a range of 5% to 5.25%.
The latest jobs report by the Bureau of Labor Statistics report revealed that the U.S. economy added 339,000 new jobs in May, far better than the 190,000 new jobs that economists predicted.
However, that rosy job situation was countered by the fact that unemployment took a big jump from 3.4% to 3.7%. While economists had expected the unemployment rate to rise one-tenth of a percent, the surge in unemployment was the largest since the early days of the pandemic and November 2011 before that.
According to the Bureau of Labor Statistics, the increase in unemployment was due to workers who completed temporary work, as well as permanent job losses. Labor force participation remained steady at 62.6%.
For the month, some of the largest job gains were in the sectors of professional and business services, health care, leisure and hospitality, and government work.
GDP & Consumer Spending
The latest data on Gross Domestic Product paints a picture of a stronger-than-thought U.S. economy.
Gross Domestic Product rose by 2.0% in Q1 of 2023 according to third estimates released by the Bureau of Economic Analysis on June 29th.
That represents a significant 0.7 percentage point revision from the second estimate of Q1’s GDP, which was 1.3%. The GDP estimate for Q4 2022 was also upwardly revised to 2.6% per the BEA’s most recent report.
Those upward estimates were based on stronger exports and increases in consumer spending, state, and local government spending, and federal spending. Those increases in spending countered slight drops in residential fixed investments and private inventory investments.
Personal income did increase 0.4% in May, or $91.2 billion, according to the Bureau of Economic Analysis, while nominal spending inched 0.1% higher for the month. When adjusted for inflation, real spending was actually negative – the third monthly decline in the first five months of 2023.
Housing and Mortgages
After a sharp decline driven by an increase in mortgage rates, the housing market is showing signs of life. The average home sale price increased for two months in a row this spring, reversing a trend of price drops that started last summer and fall.
New construction is now booming, a typical leading indicator of the overall housing market. In May, U.S. single-family home building permits surged the most in three decades since 1990. For the month, housing starts jumped to a seasonally adjusted annual rate of 1.631 million units, up from 1.34 million in April.
On the existing home sales side, a lack of available inventory is still depressing market activity. In fact, the housing market today has 39% fewer homes for sale than before the pandemic.
More than anything else, low inventory is a symptom of record-low mortgage rates in years past. For instance, according to Redfin:
It’s no wonder why homeowners are reluctant to sell when it means giving up their record-low interest rate (and facing today’s higher rates when they go to buy again).
If anything, a severe shortage of homes for sale will keep prices afloat thanks to strong buyer demand.
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”
— George Soros