Weekly Market Update - June 2, 2023
Dow Jones Industrial 33,763 +2%, S&P 500 4,282+1.8%,
Nasdaq Composite 13,421 +2%, US Ten Year 3.70%, Crude Oil $71.94
After months of back and forth, the U.S. government narrowly averted a catastrophic default by agreeing to a bill to raise the debt ceiling. In the weeks leading up to the default “D-Day,” (which was anywhere between June 3rd to June 5th depending upon which economist with whom you spoke) the market largely expected the issue to be resolved. In any event, the negotiated agreement between the democrats and republicans removed a severe tail-risk event for world markets.
Friday’s monthly jobs report was greeted warmly by investors even though the Nonfarm Payrolls figure came out much higher than expected (the May NFP number rose 339,000 vs estimates of 190,000), which could have indicated more hawkish Fed action to cool and overheating economy. However, within the jobs report, Friday’s data showed average hourly earnings rose less than economists expected year over year, and the unemployment rate was higher than expected, both hinting at some areas of weakness in the labor market. The next big question for the market is if the Fed will hike 25 basis points in the June meeting or pause. The below chart shows the Federal Funds rate over the last 10 years.
One thing is certain – the short-term Treasury market continues to pay healthy yields for those seeking short-term capital preservation and income. As of 3pm today (6/2), the average tax-adjusted annualized yield for a one-year ladder (using 3-month “rungs”) is 5.95%, using a 10% state tax rate for New York investors. The U.S. economy’s resilience has extended the life of this short-term strategy, as it appears the Fed may have to keep rates at an elevated level well into 2024. For those investors still sitting on high cash balances, we implore you to reach out to your advisor at M&R to discuss this strategy in further detail. With the debt-ceiling crisis averted, the U.S. government maintains its status as a riskless counterparty, and if you are in cash, you should to take advantage of this to protect your assets against inflation.
For those investors who have been skittish about stocks due to the overhang concerns of the debt ceiling and/or inflation, there is reason to become more bullish. The debt ceiling crisis has been averted, and the battle against inflation is moving in the right direction for Chairman Powel and the Fed. The chart below from tradingeconomics.com shows the U.S. Inflation rate (measured by the Consumer Price Index) over the last 10 years.
If you are investing in stocks in 2023, it is important to own companies with business models that will continue to be profitable and grow no matter how long the Fed decides to continue raising rates and/or keep rates elevated. These are the types of companies we make painstaking efforts to find when building portfolios for our clients. If you would like to update your investing strategy, or get a general portfolio check-up, please don’t hesitate to reach out to your advisor – WE ARE HERE TO SERVE YOU!
Have a great weekend