Markets Rebound Sharply in the First Half
Equity markets rebounded sharply in the first half of the year as inflation cooled and the labor market remained strong. Coming off of the worst year since 2008, valuations corrected sharply in 2022, and have expanded in 2023 as fundamental underpinnings for global markets stabilized, and in the case of the US, accelerated into quarter end.
To recap, the S&P 500 rose +16.9% through June 30, followed by Mid- and Small-Caps, as measured by the S&P 400 & 600 Indices, which rose +8.8% and +6.0%, respectively. Performance was exceptionally strong in the month of June, where Mid-, Small-, and Large-Caps rose +9.2%, +8.2%, and +6.6%, respectively on the back of stronger than expected economic data and downward inflation surprises. The data thus far continues to underscore the resilience of the US economy and defy skeptics who believed a recession was imminent in the first half of the year.
While equities have rallied significantly in the first half, it has largely been driven by a handful of Mega-Cap stocks, including Apple (+49.7%), Microsoft (+42.7%), Alphabet (+36.3%), Amazon (+55.2%), Meta (+138.5%), Tesla (+112.5%), and NVIDIA (+189.5%), all beneficiaries from the Artificial Intelligence (AI) boom that has taken the market by storm. Looking at the S&P 500 on an equal weighted basis, the market is only up +5.5% year to date. The top heaviness of the market has propelled the S&P 500 Growth Index +21.4% so far this year, well ahead of the S&P 500 Value Index, which has gained a still respectable +12.1%. At the sector level, 4 of 11 sectors remain in the red for the year (Utilities, -5.7%; Energy, -5.6%; Healthcare, -1.5%; and Financials, -0.5%), and an additional 4 of 11 sectors that have posted positive gains, but lagged the overall market (Industrials +10.2%; Materials, +7.7%; Real Estate, +3.7%; and Consumer Staples, +1.3%). That leaves Technology (+42.8%), Communication Services (+36.2%), and Consumer Discretionary (+33.0%) as the only sectors outperforming the market. It should come as no surprise that these three sectors are home to the seven Mega-Cap stocks outlined above.
International markets rose in tandem, with both Developed and Emerging Markets posting positive gains through the end of the second quarter. Developed Markets, as measured by the MSCI EAFE Index rose +12.2%, while Emerging Markets (EM), as measured by the MSCI EM Index, rose +5.0%. Emerging Markets have been weighed down by their heavy exposure to China, which stood at nearly one-third of the index at quarter end. Chinese equities, as measured by the MSCI China Index, lost -5.0% through June 30, the mirror image of the broader EM Index. Put differently, the MSCI Emerging Markets ex-China Index, is up +9.9% year to date, thanks to a heavier reliance on Taiwan, South Korea, and India, and no direct exposure to China. Chinese data has continued to weaken as we go to press, as the reopening post-COVID has fizzled, and a lack of stimulus has dampened consumption. This in turn has put downward pressure on inflation, and may lead to increased deflationary pressures in the medium-term. Add in a 20%+ youth unemployment rate and rising tensions with the West, and the outlook gets murkier. US imports from China hit their lowest level since 2005, according to May data from the US Census Bureau, underscoring the issues plaguing China.
Bonds posted positive returns across the board as yields declined on the back of better than expected inflation prints, and a Fed “skip” at its June meeting. Long-term Treasury yields ended the quarter lower than the start of the year, as each of the 10YR, 20YR, and 30YR Treasuries rose in price. The broad Bloomberg Barclays US Government Index gained +1.6% year to date, while the Bloomberg Barclays Municipal Index gained +2.7%. Better than expected economic data buoyed credit exposures, as the Bloomberg Barclays US Corporate Index rose +3.2% and the Bloomberg Barclays US Corporate High Yield Index rose +5.4%. Given the significant rise in interest rates over the past year, the starting point for investors today (in terms of starting yield) looks favorable. Rates are near their highest levels in more than a decade, offering investors the opportunity to achieve 4%+ yields to maturity across much of the investable universe.
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Matthew Krajna, CFA
Co-Chief Investment Officer
Matthew joined Nottingham in 2012 and is a member of the Investment Policy Committee. He brings over 13 years of investment experience to the team. Matthew is responsible for conducting investment research, due diligence, and contributing to Nottingham Advisors overall investment strategy. Additionally, He is responsible for establishing the firm’s strategic and tactical asset allocations. Matthew works with investment advisors and both individual clients & institutions to help build customized investment solutions to fit their needs.
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