June was a strong month and closed out a generally solid quarter, especially for U.S. stocks. The U.S. indices were up significantly for the month, and both the S&P 500 and the Nasdaq showed positive gains for the quarter, although the Dow lagged. International markets also did well in June but ended the quarter flat. Fixed income, on the other hand, was much weaker for both the month and quarter.
Financial markets were clearly in a risk-on mode, which benefited riskier investments like tech stocks at the expense of more boring ones.
Economic improvement. A mix of good economic news and the resolution of past problems drove the strong performance in June. The resolution of the debt ceiling through 2025 took one big worry off investors’ minds, and the economic data came in above expectations in most cases. Job growth remained healthy in June, consumer and business confidence ticked back up, and both consumers and businesses kept spending.
Inflation. In addition to the economic growth, we also received good news on inflation, which continued to trend down. While still too high, the Fed recognized the improvement by keeping rates steady at its last meeting. With a growing economy and confident consumers, earnings expectations remained strong. June was a month of good news, and the markets responded.
The markets and Fed. The June jobs report showed slowing job growth—still healthy, but slower, especially for the private sector. Even with the slowdown, wage growth was high again. This should keep service inflation elevated, which was one of the worries from the last report.
These developments, along with other strong data, suggest that the Fed will likely keep hiking rates. The minutes from the last Fed meeting echoed that sentiment, rattling markets and taking the yield on the 10-year U.S. Treasury note above 4 percent. In fact, many of the tailwinds we saw for the economy and market last month are subsiding, and we can see that in recent performance.
As we move into July, the key issue will be whether inflation continues to move down and what that means for the Fed and interest rates. Market expectations are changing rapidly, and if the Fed continues to act more aggressively to fight inflation, markets could react negatively. That said, given that the underlying reason for the Fed’s actions will be continued growth, markets have an economic cushion. So, while volatility is likely, the downside may be limited.
Last month and the year so far have been very positive, and much of that good news continues. Because of that, however, the Fed will likely keep tightening, which will have a slowing effect. Even with that headwind, the news remains good—and any recession is likely some time away, which should keep markets healthy.
In short, while June was a good month, July may be more challenging. Even if it is, conditions remain favorable overall. And while volatility may show up during the month, the trend will likely remain positive over the longer term.