Running with the Bulls

Jun 12, 2023

By Jack Kraft, CFA, Investment Strategist
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U.S. equities pushed higher last week as investors embrace the higher-for-longer interest rate environment ahead of this week’s Federal Reserve meeting. The S&P 500 notched a 0.4% gain, which helped the index run into bull market territory (20% above the 2022 low). Market bulls were encouraged as this year’s rally broadened beyond Big-Tech. Smaller market capitalization companies outperformed, with the Russell 2000 adding 1.9% on the week. The Dow Jones Industrial Average increased 0.3% for the week, while the Tech Heavy Nasdaq eked out a small gain of 0.1%.

At the sector level, Consumer Discretionary led the pack jumping 2.4% last week. Elsewhere, Utilities, Energy, Industrials, and Financials all rallied more than 1%. The Technology sector declined 0.7% as buzz around Artificial Intelligence started to fade. Elsewhere, car manufactures raced higher on Electric Vehicle news that Tesla (TSLA) and General Motors (GM) are collaborating on charger connectors. Crypto also made headlines, but for the wrong reasons as the SEC cracked down on the industry. Coinbase and other popular exchanges were hit with a lawsuit. This weighed on shares of Coinbase (COIN), with the stock sliding 17.5% last week.

The biggest takeaway from last week was the widening of market breadth across small-, mid-, and large- cap companies. Just two weeks into June, the Russell 2000 has outperformed the S&P 500 by 5% so far this month. This was much needed since roughly seven Mega-cap stocks (AAPL, MSFT, AMZN, NVDA, GOOG, META, TSLA) have largely driven S&P 500 returns year-to-date.  In addition, those seven stocks make up an astounding 27% of the S&P 500 index. One way to illustrate this narrow market breadth is by looking at the returns of the equal weighted S&P 500 versus the traditional market cap weighted S&P 500. Returns look quite different with the equally weighted index up just 3%, while the normal S&P 500 is ahead by 12%. This leaves the questions will one index “catch up” or will the other “catch down” to even out the narrowness.

Strategists at Goldman Sachs’ are anticipating that the other 493 companies will catch up barring any unexpected downturn in growth or a worsening inflation environment. In fact, they are forecasting for this bull market to continue to push forward and lifted their S&P 500 year-end target from 4000 to 4500 on Friday. From current levels that is roughly 5% higher. That sounds great given this year’s rally, but equities face stiff competition with cash and investment grade credit offering compelling yields with a better risk-reward tradeoff than stocks.

Valuations have risen more than expected amid softening inflation fears and regained confidence that the Federal Reserve can navigate a soft landing. The S&P 500 is trading at an aggregate 19 times forward price to earnings (P/E), which is higher than most expected coming into the year. However, if you exclude the five largest firms (AAPL, AMZN, GOOGL, MSFT, and NVDA), which collectively trade at 29x, the indexes multiple declines to 17x forward P/E. At the moment, the S&P 500 looks to be fairly valued, and companies will need to provide earnings growth for sustainable price gains rather than continued multiple expansion. We still remain below valuation levels from the low-rate environment of 2020 and the tech bubble where the S&P 500 index traded in a range of 22- 25x next 12 months P/E.

On the market news front, it was relatively quiet last week with the Federal Reserve members gearing up for this week’s policy meeting. Volatility remains relatively non-existent with the CBOE Volatility Index, commonly referred to as Wall Street’s “Fear Gauge,” hitting its lowest level in three years. Investors have taken a risk on approach to investing this year as headwinds seem to move into the rear-view mirror. This is despite worsening data from the Institute of Supply Management that indicated a deteriorating services industry. The index surprised to the downside falling from 51.9 to 50.3 in May just barely remaining above the 50-level mark, which indicates expansionary territory.

All eyes will be on central bank’s next week as the Federal Reserve kicks off its June meeting on Tuesday. At the moment CME Group’s Fedwatch tool is pricing in a 70% probability for a pause in its rate hiking cycle. This can quickly change as inflation data rolls in with May’s Consumer Price Index (CPI) number hitting the tape Tuesday morning. Markets also will be listening closely to Fed Chairman Jerome Powell’s press conference for additional hints about whether a hike in July will be necessary. Overseas, a similar story will be going on with both the Bank of Japan and European Central Bank (ECB) meeting taking place.

Economic Calendar 06/12/2023 – 06/17/2023

2:00 PM Federal budget May -$235.5B -$66B
6:00 AM NFIB optimism index May 88.3 89
8:30 AM Consumer price index May 0.10% 0.40%
8″30 am Core CPI May 0.40% 0.40%
8:30 AM CPI year over year 4.00% 4.90%
8:30 AM Core CPI year over year 5.30% 5.50%
8:30 AM Producer price index -0.10% 0.20%
8″30 am Core PPI 0.20%
8:30 AM PPI year over year 2.30%
8:30 AM Core PPI year over year 3.40%
2:00 PM Fed decision on interest-rate policy
2:30 PM Fed Chairrman Powell press conference
8:30 AM Initial jobless claims 10-Jun 248,000 261,000
8:30 AM U.S. retail sales May -0.10% 0.40%
8:30 AM Retail sales minus autos May 0.10% 0.40%
8:30 AM Import price index May -0.60% 0.40%
8:30 AM Import price index minus fuel May 0.00%
8:30 AM Empire State manufacturing survey May -16 -31.8
8:30 AM Philadelphia Fed manufacturing survey May -10.4
9:15 AM Industrial production May 0.10% 0.50%
9:15 AM Capacity utilization May 79.60% 79.70%
10:00 AM Business inventories April 0.20% -0.10%
7:45 AM Fed Gov. Christopher Waller speaks
10:00 AM Consumer sentiment 60.8 59.2


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