Market Monitor: Summer Heat

Market Monitor: Summer Heat

July 19, 2023

Last month, the Fed finally hit "pause" on interest rate increases in June after fifteen months and ten consecutive rate hikes. The "dot-plot" indicates that Fed officials still think two further increases may be necessary in 2023. The Fed minutes released on July 5 indicate that while rate hikes may not happen at the pace we’ve seen, most FOMC members are in agreement that even tighter money supply is necessary to bring inflation to heel.

A week ago, the Bureau of Labor Statistics reported that inflation fell to its lowest rate in over two years. The Consumer Price Index was up 3% year over year in June. That’s a far cry from June of 2022’s number, 9.1%, but still not at the Fed’s 2% target. That gap still has the Fed poised for more tightening.

We thought previously the Fed kept rates at near 0% for too long. Now we worry the fast pace of hikes over the last year hasn’t yet had its full impact on the economy and that the Fed may be overdoing the hikes, which could push the economy towards a recession or more banking issues. The Fed meets again next week and markets are pricing in a near 100% probability that there is going to be another 25 basis point rate hike.

Let's get into the data:

  • Q2 earnings have started strong. Only 30 companies out of the S&P 500 had reported as of July 14th but the market liked what it saw. The high profiles reports were from some of the big banks, which generally looked good. The coming weeks will be busy for earnings reports, and this is a particularly important quarter for them to justify the recent run up in stock prices.
  • The ISM Services Index rose to 53.9 in June. The way this index works is any reading above 50 means the services sector is expanding. This was a good number for the Services sector, which accounts for two-thirds of our economy. It increased from May’s 50.3 reading and came in above expectations.
  • June non-farm payrolls of 209,000 missed estimates. The unemployment rate stayed incredibly low at 3.6%, while the labor force participation rate remained at 62.6% for the fourth straight month, lower than its pre-Covid level. It is a mixed report though, an alternative measure that included under-employed and discouraged workers rose to 6.9%, it’s highest since August of 2022.

Markets through 7/14/2023

  • The S&P 500 is up 18.41% YTD
  • MSCI EAFE (International Index) is up 14.71%
  • Barclays Aggregate Bond Index is up 2.29%

The Smart Investor

Everything has been hot recently. You walk outside and immediately sweat. It might even be hot inside if you’re AC is like mine, struggling. Markets have been hot this year too. While it seems natural to get complacent and hide within the summer doldrums, there’s rarely a time that’s appropriate to be complacent with your money.

What should investors focus on?

  • Have your goals changed? Lining up your current financial situation with long-term goals is critical to achieving them.
  • Do you need to realign risk in your portfolio allocation? Equity market values have recovered, and you may be out of alignment with your risk tolerance if the last time you rebalanced was at the end of last year.
  • Budgeting isn’t fun – but staying on top of expenses keeps lifestyle creep at bay and identifies problems before they get bigger.
  • What are you doing with your cash? It's not just a volatility buffer anymore; cash is generating returns. Consider where you are holding it and potentially make changes.

Summer is a great time to relax and enjoy all the reasons you work as hard as you do. But your money shouldn’t be taking any vacations - it needs to keep working so you can eventually stop. Checking in and ensuring you’re making good choices will keep you moving closer to your goals.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities that represent the stock market in general. The Bloomberg Barclays US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate-term investment-grade bonds traded in the United States and is used for measuring the performance of the US bond market. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East. This material is provided as a courtesy and for educational purposes only. Investing involves risk including loss of principal. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. This article contains links to articles or other information that may be contained on a third-party website. River City Wealth Management is not responsible for and does not control, adopt, or endorse any content contained on any third-party website. The information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. Past performance is not indicative of future results.