June Newsletter to Clients

Enjoy this month’s edition that features a market review, mid-year stock market results and a summary of bonds.

Did you feel it last week? Last Thursday, June 8 the S&P 500 index of large, U.S. stocks officially entered a Bull market. By definition, that means the index gained 20% or more from a recent low. Until that day, the index had been in a bear market for 248 days! That’s the longest bear market since 1948. Now, the S&P 500 is still 10.5% off its record close on January 3, 2022 so the declines in value we all experienced last year haven’t yet been erased, but the movement in 2023 so far has been in the right direction. 

Market historians like to use the 20% up or down mark to measure shifts in investor sentiment. Other than that, does the Bull moniker mean much? Yes and no. For starters, it means the market has relaxed about the possibility of a default by the U.S. government after the debt ceiling crisis was averted. It also means the market has believed the Federal Reserve wouldn’t raise short-term interest rates yesterday – it didn’t – and a pause in interest rate hikes is good for the market. 

But, those are macro issues and, ultimately, what investors look for when considering whether to pay higher prices to own parts of companies is corporate earnings/profits and if they will grow in the future. So far this year, corporate earnings – with some exceptions – are down. Furthermore, the price to earnings ratio of the S&P 500 is at about 19 now. That means investors have to pay $19 for each $1 of expected earnings of companies in that index – a bit on the expensive side historically. 

Mid-year (almost) results:
•    S&P 500 – 12.8%;
•    Russell 2000 (small company stocks) – 6.6%;
•    MSCI EAFE (international stocks) – 10.8%;
•    NASDAQ (technology stocks) – 27%.
Bonds

2022 was an anomaly because stocks and bonds both declined in value at the same time. Bonds, of course, are included in our portfolios to help smooth out the ride while providing income. Due to historically low interest rates over the last decade, bonds produced less income than we normally expect. Last year, as the Federal Reserve raised short-term interest rates to help lower inflation, bond values declined. As it became clear early last year that rates were rising, we increased exposure to short-term bonds for many of you because the prices of those types of bonds typically decrease less when interest rates rise than longer-term bonds do. For instance, the mutual fund Lord-Abbett Short Duration Income Fund (LLDYX) returned -4.5% while the broader bond index lost 14.61%. 

While the increase in interest rates hurt the returns of both stocks and bonds last year it has brought bond yields more to where they have been historically. The yield of LLDYX is currently about 4.7% and the yield of Dodge & Cox Income Fund (DODIX) is about 3.6%. Both are providing income much higher than we’ve seen in previous years, which is a main part of their job. 

Thank you for your continuing confidence.