June 2023 Market Perspective

Bill Hastie, Managing Partner |

Volatility from the first quarter of the year continued throughout April and May, mostly attributable to the prolonged debt ceiling negotiations between President Biden and Speaker of the House Kevin McCarthy. After extensive discussions, a deal was finally reached with days left before the so called “X-Date” – the date on which the U.S. would default on its debt obligations. From the beginning of their deliberations, both sides agreed that a U.S. default would be catastrophic not only for the U.S. economy but for the global economy. With concessions on both sides, a deal was finally reached.

With the debt ceiling negotiations resolved, investors are turning their attention back to the Federal Reserve (Fed) and its ongoing fight against inflation. Following a decline of GDP in the first quarter and an increase in the unemployment rate seen last week, the so called “soft landing” (avoiding a recession) seems more of a possibility and many experts are calling for the Fed to pause rate hikes at their next meeting, scheduled for June 13-14. Currently, the CME FedWatch Tool predicts more than 70% probability of a Fed pause. This probability will be impacted by next week’s release of the Consumer Price Index (CPI) report on June 13.

Although all three major indices saw continued gains throughout April and May, a closer look reveals an interesting dynamic at play. The performance of the S&P 500 was driven by the top 7 stocks in the index – Apple, Microsoft, Amazon, NVIDIA, Alphabet (Google), Meta (Facebook), and Tesla. Through the end of May, the S&P 500 was up 8.9% YTD – with the top 7 stocks up 12.5% and the remaining 496 S&P 500 stocks down 2.6%, collectively. This was predominantly driven by NVIDIA, who was up 235% YTD at the end of May when the company’s valuation topped the $1 trillion mark. This has led to the Nasdaq increasing 27.01% as of June 2, 2023, after tumbling 33.01% in 2022.

A deeper look shows that less than 1.4% of the stocks in the S&P 500 drove more than 100% of its return in the 1st quarter.  This means that 98.6% of the stocks in the S&P 500 had negative performance in the first quarter and were even “more negative” by mid-2nd quarter.  What’s more, the Dow Jones Industrial Average was up only 0.93% in the 1st quarter.  Why is this important? It indicates that the vast majority of U.S. stocks were at best flat, and most negative, for the 1st quarter of 2023, and their performance got increasingly worse as the 2nd quarter progressed.

Most investors, including HFG’s clients, are invested in diversified portfolios containing a combination of stocks, bonds, and other assets.  While S&P 500 performance this year is entirely attributable to only seven stocks, the remaining 496 stocks in the S&P 500 experienced negative performance in the 1st quarter.  What’s more, these 493 stocks were had even “more negative” by mid-June.  Diversified portfolios, therefore, held many stocks in other areas of the market that underperformed these seven.  The best example is the Dow Jones Industrial Average that returned only 0.93% in the 1st quarter.  The Dow represents 30 of the largest stocks on the U.S. that earned nowhere the return of the S&P 500.

Your PPS investments are prudently allocated across various diversified asset classes.  Our portfolios have been positioned to take advantage of long-term growth rather than chasing short-term rallies.  We continue to monitor each fund to determine if/when changes are warranted.  Should you have any questions regarding your PPS investments, please do not hesitate to contact our office.