July 2023 Newsletter

Market Commentary

As the first half of 2023 comes to a close, volatility in the markets has fallen significantly. The S&P 500 volatility index, measured as a ratio of put option and call option prices over the next 30 days, is at a level we haven't seen since the end of 2020. The Dow Jones Industrial Average has gained 2.64% over the past 6 months. The S&P 500 has gained 14.5% year to date, driven mainly by a handful of technology companies. The Nasdaq Composite, which includes almost all of the stocks listed on the Nasdaq stock exchange, has gained 30.59%. 

The S&P 500 index is a market capitalization weighted index.  This means that the largest companies have the largest influence on the performance.  As we have seen for the first half of the year, the information technology sector and the consumer discretionary sector, which includes companies like Apple, Amazon, Microsoft, Nvidia, Meta, Google and Tesla have returned 47% and 29% respectively.  Due to the fact that these companies happen to be the largest in the index, they have been responsible for a large percentage of the gains. In fact, according to Goldman Sachs, those seven companies have returned a combined 53% as of the end of June, while the other 493 stocks are only up .1%. To understand how the total market is performing on an equal weighting, we can look at the S&P 500 Equal Weight Index, which has only returned 4.18% for the year, compared to 14.5% for the market capitalization weighted index.  The difference in the two indices show how influential the top companies are and how they have driven the performance for the year.

The 2-year Treasury rate has increased 78 basis points this quarter  to 4.879% and the 10-year Treasury rate finished the quarter at 3.819%, increasing just under 30 basis points. The spread between the 10-year treasury note and the 2-year treasury note is often used as an indicator for future economic expectations.  When the difference is positive, longer term rates are  higher than shorter term rates, investors are expecting stronger growth. When the spread is negative, as we see today, investors are expecting weaker economic growth and possible recession in the future.

Oil prices have remained stable over the past three months, trading between $67 and $75 per barrel. Gold has retreated from its peak of $2,055 per ounce in early May to close the quarter at $1,929 per ounce, returning –2.87%.

Inflation, measured by the Consumer Price Index rose .1% in May and rose 4% over the last 12 months.  Used cars and trucks continues to be the largest contributor to the increase in prices, while energy is seeing the largest declines.