June was a strong month for financial markets, closing out a generally strong quarter. Supported by strength in the underlying economy—including moderating inflation—this performance helped get summer off to a good start.
The Risk Is On
The U.S. equity markets were up significantly for the month, with the S&P 500, the Nasdaq Composite, and the Dow Jones Industrial Average (DJIA) up 6.61%, 6.65%, and 4.68%, respectively. Both the S&P 500 and Nasdaq also showed strong gains for the quarter, rising 8.74% and 13.05%, but the DJIA lagged with a quarterly gain of just 3.97%.
Developed and emerging markets also did well in June, but weakness in May held back quarterly performance compared with U.S. markets.
Fixed income, on the other hand, was much weaker over the month and quarter due to rising longer-term yields. The 10-year U.S. Treasury yield rose from 3.61% at the start of June to 3.81% by the end of the month. This indicates that markets were in a risk-on mode, which typically benefits riskier investments, such as tech stocks.
Economy Continues to Exhibit Strength
Market performance was a reflection of the underlying economy. Economic growth in the first quarter of 2023 was revised up significantly from initial estimates. Strong job creation during the second quarter should help keep that growth trend going.
More jobs have fueled income and spending growth, and last month also saw consumer confidence rise significantly. A strong economy is good for corporate earnings, which we saw reflected in stock prices.
The Downside to Growth
That surprisingly strong growth has a downside, however: it can cause inflation to heat up and weigh on fixed income performance. While the Fed paused its rate increases in June, officials have warned that more increases are likely. Longer-term interest rates have moved up, which was a headwind for bonds last month.
That said, the inflation news continues to improve. While still too high, inflation has come down, reaching its lowest level in some time last month. Consumer inflation peaked at 9.1% in June 2022, and it ended May 2023 at 4%. While this is still too high on an absolute basis, the relative improvement over the past year is evidence that the Fed’s tighter monetary policy is working, which means rates could stabilize at or close to current levels.
Good News, Despite the Risks
So, on the whole, last month’s news was good. The economy continued to grow, as more people got jobs and worked and spent money. While inflation is still too high, it’s moving in the right direction. And while the Fed is alert for inflation, it is very likely nearing the end of the rate increases.
There are, of course, risks. The biggest domestic risk is that inflation spikes again, which could drive interest rates higher and force the Fed to keep hiking. Beyond the U.S., we still have a war in Europe, and China remains a wild card. And that’s not even considering the risks we don’t see yet. Nothing is guaranteed.
Despite those risks, the fundamentals are healthy. The economy may be slowing, but it’s still growing. We settled the biggest potential political disruption of the economy last month (i.e., the debt ceiling), which is a big positive, and while there are still real concerns around inflation, the likelihood is that we will keep making progress.
And that’s a good way to start the summer.
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