June Recap and July Outlook
The Fed finally hit “pause” on interest rate increases in June after fifteen months and ten consecutive rate hikes. They believe that two more increases might be needed in 2023, indicating that the pause is temporary. The minutes released on July 5 suggest that most Fed members agree that tighter money supply is necessary to control inflation.
There are signs that the previous rate increases are starting to have an impact. The June non-farm payroll report showed lower-than-expected numbers for the first time in 15 months, but wages are still growing strongly.
The concern about a possible recession weighed on the markets during the first half of the year. However, the timing of a potential recession has shifted towards the end of the year, giving the Fed more flexibility to raise rates if needed and allowing them more time to evaluate incoming data.
Stock markets have rebounded from a downward trend, reaching a 20% increase from the lowest point in October 2022 on June 8. It remains uncertain whether this signifies a true bull market, a temporary rally, or a potentially misleading market trend.
What is the Data Saying?
The Fed's pause on rate increases in June is likely to come to an end with a small increase at the late July meeting. If they decide to raise rates further this year, it will probably happen in the Fall.
So, what does this mean for rate decreases? The Fed believes that a recession can be avoided, thanks to the economy's ongoing strength. However, inflation remains a concern. While it's lower than last year, the rate of decrease has slowed down, and bringing it down from 4% to 2% is proving to be a challenge.
Fed Chairman Powell believes it will take until 2025 for inflation to go back to acceptable levels. If the economy continues to stay strong and avoids a recession or has a mild one, we might see rate decreases starting in early 2024.
However, not everything is responding to Powell's efforts to slow down the economy. Housing, which makes up a big portion of the Consumer Price Index (CPI), is still a major concern. Renting costs are going down, but many people still find it difficult to afford. Owning a home has become more expensive, with mortgage rates reaching 6.8%. The gap between owning and renting is now larger than it has been since 2000, according to John Burns Real Estate Consulting.
The economy is like a complex puzzle, and right now, some pieces just don't seem to fit together.
Equity Markets in June
The S&P 500 was up 6.47%
The Dow Jones Industrial Average increased 4.56%
The S&P Mid-Cap 400 rose 8.96%
The S&P Small-Cap 600 returned 8.03%
Source: S&P. All performance as of June 30, 2023
Stock markets had a good month and many different stock groups went up, making the overall performance positive at the middle of the year. A lot of different companies and industries did well, with consumer-related businesses showing the highest increase in value. Industries like manufacturing and materials also had significant gains.
In June, the interest rates on 10-year and 30-year U.S. Treasury bonds slightly increased compared to May. This was because investors showed more interest in buying bonds, leading to higher yields. However, despite this increase, the overall performance of bonds, as measured by the Bloomberg U.S. Aggregate Bond Index, was negative during the month. The 10-year U.S. Treasury yield ended at 3.83%, up from 3.64% in May, while the 30-year U.S. Treasury yield ended at 3.86%, just slightly higher than the 3.85% in May. The Bloomberg U.S. Aggregate Bond Index had a return of -0.35% during this period.
The Smart Investor
The Federal Reserve Bank of New York reported that consumer credit card debt is at almost a trillion dollars – $988 billion, to be exact. This is an increase of 17% over last year.
With credit card rates sharply higher, this can put a huge dent in monthly budgets and long-term plans. The mid-year point is a good time to take stock of current finances, make sure goals are on track, and identify any areas of stress or potential shortfalls.
What should investors focus on?
Have your goals changed? Lining up your current financial situation with long-term goals is critical to achieving them
Do you need to realign risk in your portfolio allocation? Equity market values have recovered, and you may be out of alignment with your risk tolerance if the last time you rebalanced was at the end of last year
Budgeting isn’t fun – but staying on top of expenses keeps lifestyle creep at bay and identifies problems before they get bigger.
What are you doing with your cash? It’s not only a volatility buffer anymore; cash is generating returns. Consider where you are holding it and potentially make changes.
Summer is a great time to relax and enjoy all the reasons you work as hard as you do. But your money shouldn’t be taking any vacations – it needs to keep working so you can eventually stop. Checking in and ensuring you’re making good choices will keep you moving closer to your goals.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but are intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax or financial advice. Please consult a legal, tax or financial professional for information specific to your individual situation.
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