The tech-heavy Nasdaq Index had another strong quarter, rising 12.81% and bringing its year-to-date gains to 31.73%. Despite resilient economic growth, and expectations for sustained inflation, the Federal Reserve (Fed) paused in its path to higher rates.
The U.S. economy demonstrated its resilience over the 2nd quarter. Despite still high levels of inflation, rising interest rates, ongoing geopolitical instability, and domestic bank failures, the strength of economic activity generally encouraged equity and corporate bond investors over the period. A strong labor market, bolstering consumer confidence and consumption, was key throughout the quarter.
But there were also signs of weakness. Only 209,000 new jobs were added in June, according to the July 7 report from the Department of Labor. The figure was significantly less than May’s total of 306,000 new jobs and the weakest month for job growth since December 2020, when 268,000 jobs were lost.
Additionally, factory orders were weaker than expected in May at 0.3%, the same growth as in April, according to the Commerce Department’s July 5 release. And while consumption was robust over the quarter, when adjusted for inflation, spending actually softened. Meanwhile, the personal savings rate has continued to fall, with the latest data showing it near 4.6%, well below its long-term average near 9%, according to the Bureau of Economic Analysis (BEA) report released on June 30. And while overall job growth was clearly strong over the quarter, the hours in the average work week declined, and part-time employment rose substantially in June, raising questions about the demand for labor.
Nevertheless, the more sanguine economic backdrop led to better than expected overall corporate earnings, and stocks were strong in the 2nd quarter. When the quarter ended, the Nasdaq Composite Index had delivered its best first half of a year since 1983, while the S&P 500 Index saw its year-to-date gains rise to 15.91%. Both the Nasdaq and the S&P 500 indices benefited from enthusiasm for artificial intelligence (AI), seeing it as an emerging trend fueling future technology investment.
But the best news may have been that inflation continued to decline with the Consumer Price Index (CPI), a common gauge of inflation, falling in May to a 4% rise over the previous 12 months – the smallest 12-month increase since March 2021, according to the Bureau of Labor Statistics (BLS). And while Core CPI (which doesn’t include the more volatile food and energy components) was higher, at 5.3% over the past 12 months, there were increasing signs that it too may be rolling over.
In this environment, the Fed chose to pause its steady cadence of interest rate hikes. Despite robust growth and rising inflation, the Fed opted to take a month off. While the minutes from the meeting leading to this decision (released on July 5) revealed the uncertainty amongst the Fed’s voting members, there seemed little doubt in their minds that more hikes would be necessary. The question was when.
For more on the economy and the markets, see: Thrivent 3rd Quarter Market Outlook, by Chief Investment Strategist Steve Lowe.
U.S. stocks rise again
After dropping nearly 20% in 2022, the S&P 500 Index is getting closer to recouping those losses after another strong performance in the 2nd quarter. The index was up 8.30% over the period, from 4,109.31 at the end of March to 4,450.38 at the end of June, bringing its year-to-date gain to 15.91%. The total return of the S&P 500 (including dividends) was 8.74% over the quarter and 16.89% year to date. (The S&P 500 is a market-cap-weighted index that represents the average performance of a group of 500 large capitalization stocks.)
The Nasdaq Composite Index was up 12.81% in the 2nd quarter, from 12,221.91 at the end of March, to 13,787.92 at the end of June, bringing its year-to-date rise to 31.73%. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)
Retail sales rise
Retail sales were up 0.3% from the previous month in May as a strong labor market fueled solid consumer spending, according to the Department of Commerce retail report issued June 15. For the three-month period from March through May, sales were 1.7% higher than the same period a year earlier.
A rebound in building material sales led the May gain, rising 2.2% from April. Auto sales followed with a 1.4% rise from April and a 4.4% rise from the prior year. General merchandise sales and non-store retailers (primarily online) were also strong, up 0.4% and 0.3% respectively compared to April. Non-store retailers were particularly strong in their year-on-year gains, rising 6.5% in May. Food services and drinking establishments were also strong, rising 0.4% from April, and 8.0% from last May.
Job market cools
The economy added 209,000 new jobs in June, according to the July 7 report from the Department of Labor. The figure was significantly less than May’s total of 306,000 new jobs and the weakest month for job growth since December 2020, when 268,000 jobs were lost.
Job growth has averaged 278,000 per month in 2023, well below the average of 399,000 in 2022.
Part-time employment rose by 452,000 jobs in June, to 4.2 million. The Department of Labor suggested this increase is partly reflective of the number of people who have seen their working hours cut.
Information Technology (IT), followed by the Consumer Discretionary and Communications Services sectors, led the S&P 500 higher over the quarter, bolstered by enthusiasm for artificial intelligence (AI) and all the infrastructure it requires. After rising 17.2% in the second quarter, IT remains the year-to-date leader, up 42.77%, with Communication Services (up 36.24% year to date) and Consumer Discretionary (up 33.06%) not far behind.
No other sectors outperformed the S&P 500 over the quarter, although Utilities (down 2.53%) and Energy (down 0.89%) were the only sectors to generate a negative period return, deepening their year-to-date losses.
The chart below shows the results of the 11 sectors for the past month, 2nd quarter, and year to date.