Overall, the market and economic updates for Q2 were optimistic, with better-than-expected economic fundamentals supporting market gains to the end of the quarter.
The market impact from the debt ceiling standoff was limited, and investors quickly looked past the brief turbulence once a deal was struck. The economy continued to show signs of solid growth, as evidenced by high hiring levels, progressing consumer confidence, and continued consumer spending growth. While there is still real work to get inflation back to the Fed's 2 percent target, the data shows that we're heading in the right direction for now, and further improvements are expected.
BREAKING IT DOWN
Debt Ceiling Concerns Fade
The debt ceiling standoff that dominated headlines and created uncertainty throughout May was successfully resolved at the start of June. The last-minute compromise to suspend the debt ceiling until 2025 (likely to become another hot-button issue as we get closer) effectively ensured that the economy and markets didn't have to suffer through an unprecedented government default, meaning the worst market risks from this event are behind us for now.
Equity Markets Surge
June was a strong month for equity markets as resolving the debt ceiling impasse helped to lower uncertainty and supported a risk-on environment. The positive monthly returns capped a solid quarter for stocks. Technical factors were supportive for the quarter. All three major U.S. indices finished June above their 200-day moving averages (a technical signal that can indicate a shift in investor sentiment when there are prolonged breaks above or below this level) for the sixth month, a positive sign.
International markets also had a positive quarter, but weakness in May held back quarterly returns compared to U.S. markets. While the MSCI EAFE Index gained, the MSCI Emerging Markets Index had a more challenging time.
Fixed-Income Faces Challenges
Although stocks rallied during the month and quarter, the same can't be said for bonds. Rising long-term rates served as a headwind for fixed-income investors. Yields rose in June, in part due to better-than-expected economic data. High-yield fixed income, which typically performs well in a risk-on environment, rallied, and the Bloomberg U.S. Corporate High Yield Index also gained in June and for the quarter.
Meanwhile, high-yield credit spreads declined for the month and quarter. Falling spreads helped support a strong quarter for high-yield bonds and signaled a growing investor appetite for investing in higher-yielding securities.
The Economy Continues to Grow
The economic updates released in June continued to show signs of a surprisingly resilient economy. The May jobs report showed that significantly more jobs were added than expected, which means that despite tighter fiscal conditions, businesses continued to invest and hire during the quarter. Consumer confidence and spending also improved, and consumer inflation on a year-over-year basis notably fell. The relative improvement over the past year proves that the Fed's tighter monetary policy is working.
Outlook for the Second Half of the Year
These positive economic updates show that the economy continued to grow in the second quarter. Still, faster growth could lead to more inflationary pressure and more rate hikes pressuring bond and stock valuations. Notably, we haven't seen evidence that the positive growth in the quarter has directly caused additional inflationary pressure, and the improvements we've seen have been encouraging. While the Fed held off on hiking interest rates at its June meeting, investors and economists expect to see at least one additional rate hike of 25 basis points (bps) this year.
While international risks remain (highlighted by the ongoing war between Russia and Ukraine and fears of a potential slowdown in the Chinese economy), the market impact from the Russian invasion is largely behind us. However, further hostilities could lead to additional uncertainty and volatility.
We cannot predict, but we can plan. While very real risks should be monitored, continued economic growth and market appreciation are likely, as solid economic fundamentals should help support markets over the longer term. Of course, there are also unknown risks that we can't predict at this time, which always have the potential to impact markets negatively. Since the potential for short-term uncertainty remains, a well-diversified portfolio that matches investor timelines and goals remains the best path forward for most. Please do not hesitate to contact our office if you have questions or want to check in. We are happy to walk you through our approach and explain what we are doing to keep you on track to meet your financial goals and needs. We look forward to hearing from you and hope you have a wonderful week.
Charles D. Dodds, Jr., CFP®, CLU®, ChFC®, CIMA®
President, Sr. Portfolio Manager
Adrian F. Dodds, CFP®
Managing Partner, Sr. Financial Advisor