Scenes From The Chop House

June 8, 2023

As we concluded a tense month in global financial markets, all eyes turned toward Washington where the ongoing debt ceiling crisis appeared to be nearing a resolution. Negotiations dominated headlines throughout April and most of May until fears swelled to a crescendo late in the month when Treasury Secretary Janet Yellen delivered a letter to Congressional leadership announcing a June 5th deadline after which the Treasury would be “unable to meet all of the government’s commitments.”1 Despite the typical political machinations, negotiations appeared relatively cordial and productive this time around. At the time of this writing, the crisis has ended as the bill to extend the debt ceiling has passed both houses of Congress and was granted final approval from the White House.

Domestic equity markets were moderately choppy through the month with spikes in volatility coinciding with modest declines during the first and last full trading weeks of May. Domestic indices finished the month roughly flat with the S&P 500 returning 0.56%. The tech sector was a notable standout for the month as the NASDAQ Composite returned 5.93%, buoyed by strong performance from mega cap tech names. Semiconductors saw a surge in shares on the heels of an earnings surprise from NVIDIA who vaulted themselves into the hallowed Trillion Dollar Valuation Club joining Apple, Microsoft, Google, and Amazon.

International equity markets were less fortunate than those here at home over the course of May. Developed International Markets as represented by the MSCI EAFE Index fell 4.12% on the month, ending a brief period of international outperformance against U.S. equities. International central banks continue to struggle with their own rate hike paces with many still well behind the Federal Reserve’s current rate levels and hike cadence. Likewise, inflation continues to be elevated in most developed economies but declining from the ostentatious levels observed in late 2021 and 2022. Emerging markets also struggled with the MSCI Emerging Markets Index falling 1.66% on soft economic activity data out of China.

Fixed income markets were particularly unusual in May as short-term Treasury yields crept higher over most of the month as markets weighed the ramifications and knock-on effects of a potential U.S. default. Noticeable dislocations in yields began forming around the stated June 5th “default date” as Treasury buyers fretted over the prospects of missed or delayed payments. Broad domestic bonds as represented by the Bloomberg U.S. Aggregate Bond Index closed the month down 1.09%. The Fed’s decision to hike an additional 25 basis points at their May meeting did push yields modestly higher across the curve, but a late month narrowing of credit spreads dampened the overall impact to returns.

The Fed’s presence still looms large over markets as the Federal Open Market Committee (FOMC) meets mid-June to discuss the prospects of additional rate increases. Strong recent economic data seems to offer cover for additional hikes and Chairman Jerome Powell’s rhetoric has left little doubt that the Committee is laser focused on their inflation control mandate. To that end, the Fed Fund Futures market currently reflect an expectation of at least one additional rate hike in June or July. Conversely, obvious stresses on the banking system and housing market might suggest a “pause” in the Fed’s hiking spree. The yield curve continues to reflect expectations of some cuts in the near to intermediate term while Fed Fund Futures markets are already pricing in one to two rate cuts by year end.

Despite a year already fraught with a variety of macroeconomic and geopolitical hurdles, year to date returns for most major asset classes have been solid. Bombastic headlines and widespread investor angst over a shadowy future shouldn’t distract one from the point that, so far, 2023 has been a much-welcomed bounce back from an unpleasant 2022.

Hunter Brooks
Portfolio Manager

Published May 26, 2023; Accessed June 7, 2023

The S&P 500 Index is the Standard &Poor’s Composite Index of 500 stocks and is a widely recognized, unmanaged index of common stock prices.

The NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market and it is highly followed in the U.S. as an indicator of the performance stocks of technology companies and growth companies.

The MSCI EAFE Index (Europe, Australasia, Far East) is an unmanaged free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada

The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets.

Bloomberg U.S. Aggregate Bond Index is an unmanaged index of prices of U.S. dollar-denominated investment-grade fixed income securities with remaining maturities of one year and longer.

The Federal Open Market Committee (FOMC) is a committee of the Federal Reserve Board that meets regularly to set monetary policy, including the interest rates that are charged to banks.

Fed funds futures are financial futures contracts based on the federal funds rate and traded on the Chicago Mercantile Exchange (CME) operated by CME Group Inc.(CME).

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