June Stock Market Update
Hello. I’m Jordan Daugherty, Investment Analyst here at FSA, and this is our June market update. Stock indexes barely made it into green for May. Corporate and government bond investors were relieved to inch into positive territory as well after posting the worst start to a year since 1980. The gains were welcome, but honestly, they were a drop in the bucket, and they didn’t come easy. As you can see in the chart, the S&P 500 looked a lot like a roller coaster ride in May. We spent the first part of the month tumbling past the previous lows set in March and February. And after a brief rally, the index collapsed into bear market territory, down a little more than 20%. But, the market didn’t say uncle. It sidestepped its new low and skated up the next six trading days to keep prices flat or marginally positive for the month. It’s a volatile market out there, and really, it was a lot of pain for a 0.2% gain.
Looking at asset classes more broadly, this chart shows each asset class from best to worst. Right away the story of the year, commodities continue to outperform everything by a long shot. Both emerging market and developing market equities continued to languish at their negative year-to-date levels a bit below 10%. The red square represents U.S. bonds, or the agg. Their year to date leaves a lot to be desired for a traditionally safe asset class. But, could June be a turning point? Between rate hikes and 8% inflation, we have some doubts. But we are watching closely for a breakout that could signal a flight to safety. If or when this happens, bonds could present a potential opportunity for us.
Next, let’s look at the divergence between value and growth performance. We have an example that illustrates this nicely. Here’s a chart of the dividend and adjusted price performance of ExxonMobil and Netflix, both successful large cap companies, but you can see they’re almost a perfect mirror of each other’s performance since January. Exxon, a value-oriented energy company, is up over 60%, vastly outperforming Netflix, a darling growth stock, part of the FANG, or fan mag group of tech companies. Netflix is down 67%.
Investors are up against record inflation, higher interest rates, continued disruptions from COVID 19, and a geopolitical landscape that has just about reached fever pitch. The Russia-Ukraine war and China’s zero COVID lockdowns are destabilizing the global economic system. As you can see here, the European Union is an economic block that represents almost 18% of global GDP, nominal GDP. China’s GDP is roughly the same size, about a percent less. So together, these two account for nearly one third of global GDP. Between Europe’s energy crisis and China’s zero COVID lockdowns, the world is holding its breath trying to guess where the chips are going to fall.
FSA’s Safety Net was triggered to reduce risk in early January. Portfolios in our most conservative strategies have cash or money market holdings of about 90%. More aggressive strategies are holding up to 70% cash or money markets. We have also reduced exposure by using inverse funds. Holding cash during bouts of high inflation can really be tough on your savings. The good news is that money market rates have trended higher since January, increasing from practically nothing to about 1% and trending higher. So, these are basically free earnings that we can apply to portfolios where it makes sense.
It’s a complicated investing environment out there, and change is certain. Please consult your advisor with any changes that might affect your plan.
We hope you enjoy the summer ahead, and thank you for watching.
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