June 2023 Financial Market Update
After a strong April, major U.S. equity indices experienced a mixed May, with technology and artificial intelligence stocks leading the way and capturing the market’s attention.
Here is the tale of the tape for the month of May: The S&P 500 ($SPX) rose by 0.25%[i], the Nasdaq 100 ($NDX) surged by 7.61%[ii], and the Dow Jones Industrial Average ($DJI) declined by 3.49%[iii]. Capital flowing into technology and shifting away from industrials has been eye-popping.
Technology + AI Surged in May
With AI on the minds of many, technology stocks continued to surge in May. The Nasdaq and its mega-cap counterpart, the Nasdaq 100, have outperformed[iv] other U.S. indexes thus far in 2023.
Recent earnings from chipmaker giant NVIDIA were massive, showing a 19% increase[v] in revenue in the first quarter that ended on April 30th, 2023. That’s big, and it’s because of AI.
Over the past several years, NVIDIA’s business has expanded due to the increasing demand for its graphics processing units (GPUs). These specialized processors (also known as video cards) power multi-monitor setups at the office, enable graphics-intensive games, and have powered cryptocurrency mining technology over the last decade.
NVIDIA’s recent valuation surge has been attributed to the AI chips they produce, and the company briefly reached[vi] a $1 trillion valuation, joining the ranks of Apple, Microsoft, Alphabet, and Amazon.
Sell in May and go away? Not in tech and not in AI.
What’s in the Debt Limit Deal?
The Fiscal Responsibility Act of 2023 (here is the 99-page bill)[vii] suspends the debt ceiling until Jan 1, 2025. Spending caps are also included for the next two years, limiting military spending and nonmilitary discretionary spending.
The bill also includes some changes to IRS funding, return of unspent COVID-19 funds, and some adjustments to welfare (but not an overhaul).
Fed Minutes Show Division, Market Interpretation
Meeting minutes from the May Fed meeting showed division on rate hikes moving forward, with a split vote[viii] among voting members. Given the uncertainty over the debt ceiling in May, the Federal Open Market Committee (FOMC) voting member division on the topic makes sense.
“It remains to be seen whether the Fed is prepared to pause or skip a rate hike at a forthcoming meeting,” said Mark Hamrick[ix], senior economic analyst at Bankrate. “For officials to decide, there’s still this jobs report and the Consumer Price Index due before the June 14th Fed meeting and announcement.”
On the final day of May, the most recent read on the jobs market showed surprise strength, courtesy of the May 31st JOLTS jobs data[ix]. Job openings rose to 10.1 million in April versus 9.5 million expected. This was an increase from 9.7 million vacancies in March.
Typically, one would expect surprise job market strength to increase the chance of a Fed rate hike. However, suddenly, on May 31st, rate hike probabilities drastically shifted to a 62.2% chance of no rate hike at the June meeting, per the CME FedWatch tool[x], versus a 33.4% chance of such occurrence the day before.
The JOLTS jobs data release coincided with the day after the debt ceiling bill passed the House Rules Committee and the day of the full House vote.
Mixed Inflation Signals
Consumer Price Index (CPI)
Released in May, the April CPI data indicated moderating inflation. April data showed inflation falling to an increase of 4.9%[xi] year-over-year, just one tick lower than market expectations. This is good news amid the current inflation battle.
The 4.9% rise was the lowest annual rise since April 2021 and was the tenth straight month[xii] of declines. On a monthly basis, consumer prices advanced 0.4% in line with the Dow Jones estimate[xi]. Used vehicle prices and gasoline prices contributed to keeping average prices firm.
Personal Consumption Expenditures (PCE)
Later in May, however, the Fed’s preferred inflation gauge, Core PCE, showed inflation running hotter than expected[xiii]. What gives? For one, CPI tends to be more volatile[xiv] than Core PCE.
Slowing inflation will not be a straight line down, so zig-zags and conflicting data within identical time periods can be expected. How the Fed will interpret this data at the June meeting could be potentially exemplified by the mixed vote we saw in the minutes from the last meeting.
Have you noticed slightly lower prices on groceries? There seem to be more sales with quantity discounts and an overall easing in some food pricing. We’ll take it!
Our Take at Emerald Advisors
This is a “mixed bag” of news. We see continued Fed uncertainty with respect to rate hikes and confusing inflation signals, and yet we got a key debt limit deal averting further crisis. The combination of these factors keeps us in a situation of heightened uncertainty. Markets will closely monitor the Fed’s signals for clues on further rate hikes and keep a keen eye on inflation data to gauge its trajectory and persistence. Accordingly, Emerald Advisors will keep a weather eye for any disruptions or concerns that could impact market sentiment and stability. That said, with inflation and continued global geopolitical instability somewhat “baked in” at this point, the debt limit deal should lead to a period of relative stability in the next several months. Stay tuned while we stay focused, and let’s have a good summer!
Disclosure: Emerald Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
©Levitate, 2023
[i] (2023, May 31). Tradingview.com. S&P 500 Index. [Online] Available at: TradingView Chart — TradingView
[ii] (2023, May 31). Tradingview.com. Nasdaq 100 Index. [Online] Available at: TradingView Chart — TradingView
[iii] (2023, May 31). Tradingview.com. Dow Jones Industrial Average Index. [Online] Available at: TradingView Chart — TradingView
[iv] WSJ Markets. (2023). U.S. & America Stock Indexes. [Online]. Available at: U.S. & America Stock Indexes
[v] NVIDIA. (2023, May 24). Nvidianews.com. NVIDIA Announces Financial Results for First Quarter Fiscal 2024. [Online] Available at: NVIDIA Newsroom Press Release
[vi] Goswami, R. (2023, May 30). Cnbc.com. Nvidia crosses into $1 trillion market cap before giving back gains. [Online] Available at: CNBC Tech
[vii] Fiscal Responsibility Act of 2023. 118th Cong. (2023). [PDF] Available at: 118hr PIH Fiscal Responsibility
[viii] Mezistrano, R. (2023, May 25). Capjournal.com. Fed Officials Split On Path Forward, Minutes Show. [Online] Available at: Cj Capital Journal
[ix] Smith, C. (2023, May 31). Barrons.com. JOLTS Data Show Strength in Labor Markets. [Online] Available at: Barron’s Stock Market News
[x] CME FedWatch Tool. (2023). Cmegroup.com. Target Rate Probabilities for 14 June 2023 Fed Meeting. [Online] Available at: CME FedWatch Tool
[xi] Cox, J. (2023, May 10). Cnbc.com. Inflation rate eases to 4.9% in April, less than expectations. [Online] Available at: CNBC Economy
[xii] Hardy, A., & Glum, J. (Ed.). (2023, May 10). Money.com. Inflation Falls for 10th Consecutive Month. Here’s What’s Getting Cheaper. [Online] Available at: Everyday Money
[xiii] Wallace, A. (2023, May 26). Cnn.com. The Fed’s favorite inflation gauge just heated up – and that could mean another rate hike. [Online] Available at: CNN Business
[xiv] Nash, J. (2023, May 31). Advisorperspectives.com. CPI and PCE: Two Measures of Inflation and Fed Policy. [Online] Available at: VettaFi Advisor Perspectives
