Last Week’s Markets in Review: Can Equities Rally Higher and Will the Fed Skip?

Global equity markets finished higher for the week. In the U.S., the S&P 500 Index closed the week at a level of 4,299, representing an increase of 0.41%, while the Russell Midcap Index moved 1.04% higher last week. Meanwhile, the Russell 2000 Index, a measure of the Nation’s smallest publicly traded firms, returned 1.92% over the week. As developed, international equity performance and emerging markets were higher, returning 0.65% and 1.89%, respectively. Finally, the 10-year U.S. Treasury yield moved higher, closing the week at 3.74%.

New economic data was in very short supply over the past week. With the weekly jobless claims as the only data released, Investors were looking ahead to the Federal Reserve meeting scheduled for June 13th and 14th. Lacking new data, Investors seemed to focus on one of two topics during the week. A great deal of conversation focused on the current rally in equities. Will the rally broaden beyond the seven mega-cap stocks that have been responsible for the S&P 500 and NASDAQ year-to-date gains? The other area of focus pertained to predicting the next moves by the Federal Reserve. Investors debated the possibilities of a skip, a pause, or a hike throughout the week.

As we discussed in last week’s Capital Markets Update, most of the year-to-date gains in the S&P 500 and the NASDAQ have been created by the performance of seven mega-cap stocks. The investing world spent last week discussing this dynamic. The lack of performance breadth is a trusted warning sign that the longevity of a rally may be abbreviated. This would account for the fact that many investors are either unhappy with the move or ignoring it and keeping funds in non-risk assets.

Some investors believe that the mega-cap performance will spread to other sectors. Examining the performance of the S&P 500 month to date will support this belief. “Ten of the eleven S&P 500 sectors are firmer for the month to date, compared to only six for the year” according to Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices. An additional sign of a healthier equity market can be seen in the market’s breadth: the percentage of S&P 500 stocks trading above their 200-day moving average stood at nearly 54% on Friday, up from a low of 38% in March.

Topic number two: skip, pause, or hike. As has happened in the past, whenever there is a break in the economic news, investors begin to obsess about trying to predict Monetary Policy. With the two Fed meetings concluding (June 14th and July 26th) in a relatively short period of time, investors evaluated the possibilities. The skip scenario envisions no increase to rates after the June meeting but another 25 Bps increase after the July meeting. A pause would see no rate hikes at either of the upcoming meetings. Finally, the hike scenario predicts that the Fed plans on moving rates higher for the 11th time on June 14th. According to CME Group’s FedWatch Tool, the skip scenario has the greatest probability of occurring. Many investors are very interested in reviewing the Consumer Price Index for May as the last piece of data that is input into their analysis which will be released on Tuesday this week.

Investors should consider all the information discussed within this market update and many other factors when managing their investment portfolios. However, with so much data and so little time to digest, we encourage investors to work with experienced financial professionals to help process all this information to build and manage the asset allocations within their portfolios consistent with their objectives, timeframe, and tolerance for risk.

Best wishes for the week ahead!

Equity Market, Fixed Income returns, and rates are from Bloomberg as of 6/9/23. Economic Calendar Data from Econoday as of 6/9/23. International developed markets are measured by the MSCI EAFE Index, emerging markets are measured by the MSCI EM Index, and U.S. Large Caps are defined by the S&P 500 Index. Sector performance is measured using the GICS methodology.

Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable. You cannot invest directly in an index. Diversification can help mitigate the risk and volatility in your portfolio but does not ensure a profit or guarantee against a loss.