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Alex Krieckhaus


Tech gains lead market, and the Fed pauses

By Alex Krieckhaus, Author | 07/10/2023

Thrivent Asset Management Contributors to this report: Steve Lowe, CFA, Chief Investment Strategist; John Groton, Jr., CFA, Director of Administration and Materials & Energy Research; Matthew Finn, CFA, Head of Equity Mutual Funds; and Jeff Branstad, CFA, Model Portfolio Manager

The tech-heavy Nasdaq Index had another strong quarter, rising 12.81% and bringing its year-to-date gains to 31.73%. Despite resilient economic growth, and expectations for sustained inflation, the Federal Reserve (Fed) paused in its path to higher rates.

The U.S. economy demonstrated its resilience over the 2nd quarter. Despite still high levels of inflation, rising interest rates, ongoing geopolitical instability, and domestic bank failures, the strength of economic activity generally encouraged equity and corporate bond investors over the period. A strong labor market, bolstering consumer confidence and consumption, was key throughout the quarter.

But there were also signs of weakness. Only 209,000 new jobs were added in June, according to the July 7 report from the Department of Labor. The figure was significantly less than May’s total of 306,000 new jobs and the weakest month for job growth since December 2020, when 268,000 jobs were lost.

Additionally, factory orders were weaker than expected in May at 0.3%, the same growth as in April, according to the Commerce Department’s July 5 release. And while consumption was robust over the quarter, when adjusted for inflation, spending actually softened. Meanwhile, the personal savings rate has continued to fall, with the latest data showing it near 4.6%, well below its long-term average near 9%, according to the Bureau of Economic Analysis (BEA) report released on June 30. And while overall job growth was clearly strong over the quarter, the hours in the average work week declined, and part-time employment rose substantially in June, raising questions about the demand for labor.

Nevertheless, the more sanguine economic backdrop led to better than expected overall corporate earnings, and stocks were strong in the 2nd quarter. When the quarter ended, the Nasdaq Composite Index had delivered its best first half of a year since 1983, while the S&P 500 Index saw its year-to-date gains rise to 15.91%. Both the Nasdaq and the S&P 500 indices benefited from enthusiasm for artificial intelligence (AI), seeing it as an emerging trend fueling future technology investment.

But the best news may have been that inflation continued to decline with the Consumer Price Index (CPI), a common gauge of inflation, falling in May to a 4% rise over the previous 12 months – the smallest 12-month increase since March 2021, according to the Bureau of Labor Statistics (BLS). And while Core CPI (which doesn’t include the more volatile food and energy components) was higher, at 5.3% over the past 12 months, there were increasing signs that it too may be rolling over.

In this environment, the Fed chose to pause its steady cadence of interest rate hikes. Despite robust growth and rising inflation, the Fed opted to take a month off. While the minutes from the meeting leading to this decision (released on July 5) revealed the uncertainty amongst the Fed’s voting members, there seemed little doubt in their minds that more hikes would be necessary. The question was when.

For more on the economy and the markets, see: Thrivent 3rd Quarter Market Outlook, by Chief Investment Strategist Steve Lowe.

Drilling down

U.S. stocks rise again

After dropping nearly 20% in 2022, the S&P 500 Index is getting closer to recouping those losses after another strong performance in the 2nd quarter. The index was up 8.30% over the period, from 4,109.31 at the end of March to 4,450.38 at the end of June, bringing its year-to-date gain to 15.91%. The total return of the S&P 500 (including dividends) was 8.74% over the quarter and 16.89% year to date. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)

The Nasdaq Composite Index was up 12.81% in the 2nd quarter, from 12,221.91 at the end of March, to 13,787.92 at the end of June, bringing its year-to-date rise to 31.73%. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)

Retail sales rise

Retail sales were up 0.3% from the previous month in May as a strong labor market fueled solid consumer spending, according to the Department of Commerce retail report issued June 15. For the three-month period from March through May, sales were 1.7% higher than the same period a year earlier.

A rebound in building material sales led the May gain, rising 2.2% from April. Auto sales followed with a 1.4% rise from April and a 4.4% rise from the prior year. General merchandise sales and non-store retailers (primarily online) were also strong, up 0.4% and 0.3% respectively compared to April. Non-store retailers were particularly strong in their year-on-year gains, rising 6.5% in May. Food services and drinking establishments were also strong, rising 0.4% from April, and 8.0% from last May.

Job market cools

The economy added 209,000 new jobs in June, according to the July 7 report from the Department of Labor. The figure was significantly less than May’s total of 306,000 new jobs and the weakest month for job growth since December 2020, when 268,000 jobs were lost.

Job growth has averaged 278,000 per month in 2023, well below the average of 399,000 in 2022.

Part-time employment rose by 452,000 jobs in June, to 4.2 million. The Department of Labor suggested this increase is partly reflective of the number of people who have seen their working hours cut.

Technology leads

Information Technology (IT), followed by the Consumer Discretionary and Communications Services sectors, led the S&P 500 higher over the quarter, bolstered by enthusiasm for artificial intelligence (AI) and all the infrastructure it requires. After rising 17.2% in the second quarter, IT remains the year-to-date leader, up 42.77%, with Communication Services (up 36.24% year to date) and Consumer Discretionary (up 33.06%) not far behind.

No other sectors outperformed the S&P 500 over the quarter, although Utilities (down 2.53%) and Energy (down 0.89%) were the only sectors to generate a negative period return, deepening their year-to-date losses.

The chart below shows the results of the 11 sectors for the past month, 2nd quarter, and year to date:

Treasury yields rise again

The yield on 10-year U.S. Treasuries turned higher in the 2nd quarter, rising from 3.49% at the end of March to close the quarter at 3.81%. The rise in bond yields has been attributed to better-than-expected economic growth.

As interest rates rose, the Bloomberg U.S. Aggregate Bond Index, which tracks the performance of U.S. investment-grade bonds, fell 0.84% in the 2nd quarter, but it is still up 2.09% year to date.

Corporate earnings projections turn higher

Corporate 12-month earnings projections for the S&P 500 rose 2.30% in the 2nd quarter, supported by expectations for sustained demand and higher prices, despite reported profits decreasing 5.1% in the 1st quarter, as reported by the BEA.

Forward P/E ratio continues to rise

The forward 12-month price-earnings ratio (P/E) of the S&P 500 rose for the third consecutive quarter, from 18.06 at the end of March to 19.13 at the end of June. A higher P/E means stocks are more expensive relative to their earnings per share. The 19.13 P/E was still below the 20.96 P/E at the end of 2021.

The forward 12-month earnings yield for the S&P 500, which is the inverse of the P/E, fell for another quarter, ending the period at 5.24%. The 12-month forward earnings yield can be helpful in comparing equity earnings yields with current bond yields. The 5.24% equity earnings yield is still well above the 3.81% yield 10-year U.S. Treasuries offered at the end of June, but the gap has narrowed.

Dollar falls again vs. euro, gains vs. yen

The euro appreciated 0.42% versus the U.S. dollar during the 2nd quarter of 2023, extending its year-to-date gain to 2.23%. The euro rose 8.94% versus the dollar in the 4th quarter of 2022 but has since been more stable as both the Fed and the European Central Bank are expected to be nearing the end of their monetary policy tightening cycles.

The U.S. dollar increased substantially versus the yen in the 2nd quarter, gaining 8.6% versus the Japanese currency and bringing its year-to-date gain to 9.5%. The increase in the relative value of the dollar in the past few years has been attributed to the Fed’s monetary tightening stance versus a relatively loose monetary policy by the Bank of Japan.

Oil prices continue to slide

Oil prices fell again in the 2nd quarter due to the slowing global economy, despite production cuts announced by OPEC+ (a consortium of oil producing nations). The price of West Texas Intermediate, a grade of crude oil used as a benchmark in oil pricing, dropped 6.65% for the quarter, from $75.67 at the close of March to $70.64 at the end of June.

While gasoline prices at the pump rose 4.3% in the 2nd quarter from $3.53 at the March close to $3.69 at the end of June, they – like oil prices – remain well below their 2022 highs.

Gold prices fall

After rising significantly over the past two quarters in response to persistent inflation, gold prices fell 2.86% in the 2nd quarter of 2023, from $2,001.40 at the end of March to $1,929.40 at the end of June. The decline can be attributed to expectations that tighter monetary policy may finally be pushing inflation lower.

International equities stay strong

International equities sustained their positive momentum in the 2nd quarter of 2023, rising 1.87%, after climbing 7.65% in the 1st quarter of this year and surging 17.00% in the 4th quarter of last year. The index, which tracks developed-economy stocks in Europe, Asia, and Australia, rose from 2,092.60 at the end of March to 2,131.72 at the end of June.

What can you expect from the economy and the markets in the months ahead?
 See: The Thrivent 3rd Quarter 2023 Outlook, by Chief Investment Strategist Steve Lowe.

Media contact: Callie Briese, 612-844-7340;

All information and representations herein are as of 07/10/2023, unless otherwise noted.

The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.

Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.

Past performance is not necessarily indicative of future results.

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