Monthly Market Report: June 2023

Stock Markets Bounce Back

Prepared by Brandon Yee, CFA, CAIA, and Thomas Connelly, CFA, CFP

In the month of June, international developed stock markets returned 4.75%. Canada and the U.S. recorded returns of 6.52% and 6.63%, respectively. The U.K. and Japan lagged other markets. International developed markets are up 11.29% YTD while the U.S. market is up 16.84%. The recent change in relative performance between international developed markets and the U.S. market is due to investor enthusiasm with U.S. artificial intelligence companies. However, this current rally in the U.S. market may not be sustainable as the outperformance is being driven by a very narrow number of stocks. Most companies in the U.S. market are down or flat for the year.

Brazil and Mexico Rally

Broader emerging markets posted a 4.14% return for the month. Brazil and Mexico recorded returns of 15.95% and 5.66%, respectively. Mexico is benefiting from companies looking to shift supply chains and production outside of China. China and Korea lagged other markets in June. China’s economy continues to be weighed down by the real estate sector, but retail sales and services have started to recover. Low valuations relative to the U.S. and international markets may help emerging market investors going forward.

Consumer Discretionary and Industrials Outperform

Consumer discretionary and industrials recorded returns of 10.20% and 8.85%, respectively, in June. Telecommunications and utilities lagged other sectors this month. The information technology sector has rebounded this year after its steep 2022 decline. Much of the rally in this sector has been driven by a small number of technology companies, especially companies benefiting from increasing adoption of artificial intelligence applications. Further tightening of monetary policy by central banks could create a tough environment for the information technology sector.

Value Stocks Underperform

In June, value underperformed growth in the large-cap space and the small-cap space. Momentum recorded a return of 7.04%. Value stocks across the world continue to trade at large discounts relative to growth stocks. Value-oriented sectors such as energy, financials, and materials have underperformed this year after a strong performance in 2022.

Value Stocks Outperform in the International Markets

In the international developed markets, value outperformed growth in the large-cap space and small-cap space for the month. Momentum recorded a return of 4.14% while small-cap emerging market stocks posted a return of 4.20%. Valuations of value stocks are still very low relative to growth stocks in both international developed and emerging markets, which is consistent with the US market. Rising interest rates may also pose more of a risk to growth stocks than value stocks.

Year Over Year CPI Continues to Decline Steadily

In June, the three-month Treasury bill index returned 0.46%. From the beginning of 2022 through the end of June 2023, the annualized interest rate on the 90-day Treasury bill increased from 0.08% to 5.46%. Savers are now getting paid much more interest. However, they still face low real interest rates due to inflation remaining high as the CPI increased by 4.13% over the past year through the end of May. This means the real return to cash investors is still small even before considering taxes.

Fixed Income Investments Mixed

The returns of deflationary hedges were mixed for the month. The Bloomberg Barclays U.S. Agg Bond Index returned -0.36% for the month. In June, leveraged loans and emerging market bonds recorded returns of 2.26% and 1.93%, respectively. Short-term government bonds and mortgage-backed securities lagged the market. Catastrophe bonds are up 10.34% YTD. Insurance-linked securities like catastrophe bonds are benefiting from higher premiums that insurance companies are demanding from buyers. The higher premiums are a result of the larger realized losses in recent years experienced by the insurance companies.

Gold Remains Resilient Against Rising Interest Rates

Inflation-sensitive investment returns were mixed for the month. U.S. natural gas and U.S. real estate returned 18.34% and 5.11%, respectively, in June. The Bloomberg Commodity index posted a return of 4.04%. Gold bullion is up 5.43% YTD even though short-term interest rates and real yields continue to rise. Oil prices were up for the month as OPEC extended their production cuts. Capital expenditures by oil companies have been muted in recent years, which will impact future supply. Consumers may face spikes in oil prices if demand picks up and supply remains constrained.

U.S. Dollar Mixed Versus Other Currencies

Over the past three months, the U.S. dollar depreciated against the Euro, British Pound, Mexican Peso and Swiss Franc. Over the past year, the U.S. dollar strengthened against the Japanese Yen, Australian dollar, and Chinese Yuan. The continuation of U.S. fiscal and trade deficits may weigh on the U.S. dollar in the medium-term to long-term. Gross federal debt to GDP stands at 121% and is forecasted to increase throughout the decade.

Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.

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