The challenging year for the S&P 500 continued through June, with the market dropping -8.3% and pushing the year-to-date return to -20.0%. The primary reason for June’s sell-off was a high mid-month Consumer Price Index inflation reading, which caused the U.S. Federal Reserve to continue its aggressive interest rate policy into the summer.
Given the annual inflation reading of 8.6% (U.S. Bureau of Labor Statistics) and the resulting move by the Federal Reserve to increase short-term interest rates by .75%, economically sensitive areas of the market suffered the most disruption in June. The Energy, Materials, and Financial sectors all declined by more than -10% on increasing concerns of an economic slowdown.
Conversely, traditionally safer areas of the market outperformed during June. Consumer Staples and Healthcare outpaced the S&P 500 by an average of 5.7% on the month, as investors sought relief in their steady, predictable business models. These sectors also benefitted from an -11% drop in Commodity prices (Bloomberg Commodity Index), the first such fall in many quarters, which translated into lower production and transportation costs for these businesses.
Fixed Income markets continued to struggle in June, with the Bloomberg Intermediate Govt./Credit index dropping -1.1%. Notably, we are starting to see a bifurcation among different classifications of bonds, with higher-quality U.S. Treasury and Agency bonds holding their value, and Corporate bonds underperforming amidst an uncertain business outlook.
Looking into the second half of the year, we expect volatility to continue and to closely align with the Federal Reserve’s interest rate policy. While inflation is expected to grow above an 8% annual rate through the summer (Factset Research), the combination of high mortgage costs, cooling commodity prices, and elevated retail inventories should start to relieve some inflationary pressures as we head into the fall. If inflation moderates, the Federal Reserve will likely become less aggressive in raising interest rates, a scenario that generally benefits the stock market.
While it has been a painful year for all investors, the market historically rewards those who take a patient, long-term outlook during periods of volatility. In June, the S&P 500 officially entered a bear market, which is defined by a period of -20% returns. Looking back at the last 100 years, the median 12-month gain from the beginning of a bear market is 23.8% (LPL Financial).
While these markets have not been pleasant, we know that with time and patience, they will turn around. Thank you and we encourage you to call or email us with any questions or concerns.
Past Performance is no guarantee of future results. All investments carry some level of risk. The S&P 500 Index is an unmanaged, market capitalization weighted index of 500 common stocks widely regarded to be representative of the US market in general. Russell 2000® Index (U.S. Small Caps): Measures the performance of the 2,000 smallest companies in the Russell 3000®Index, which represent approximately 10% of the total market capitalization of the Russell 3000® Index. Russell Midcap® Index: Measures the performance of the 800 smallest companies of the Russell 1000® Index, which represents approximately 36% of the total capitalization of the Russell 1000® Index which is a mid‐cap index. MSCI EAFE Index: Measures the equity market performance of developed markets outside of the U.S. & Canada. MSCI EM Index: Captures large and mid cap representation across 24 Emerging Markets countries and covers approximately 85% of the free float-adjusted market capitalization in each country. Bloomberg U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Indices are unmanaged and direct investment is not possible. The Bloomberg U.S. Intermediate Government/Credit Bond Index tracks the performance of intermediate term U.S. government and corporate bonds. Indices are unmanaged and direct investment is not possible. The opinions expressed are those of the author and not necessarily those of Robert W. Baird & Co. Incorporated. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNERTM and CFP® in the U.S.