June 9th, 2023
Stocks built on their rally this week, notching a new S&P 500 high for 2023 and topping 4,300 for the first time since August. The move higher came on a quiet week for economic news following last week’s debt ceiling standoff. Investors saw positives in a softer than expected ISM Services print, hoping that will prompt the Fed to stay true to its words and pause on rates next week. Supporting the pause case, global trade showed signs of weakness with consumers continuing to pull back from their pandemic-fueled splurge on goods. Despite headwinds from high prices, Federal Reserve interest rate hikes, and banking sector turmoil, the S&P 500 has still managed to march higher on the back of strong performances from a handful of megacap tech stocks including Nvidia, Apple, Tesla, Microsoft, Amazon, Meta, and Google. Cumulatively, these names have accounted for 83% of the S&P 500’s total gain through June 7th. Narrow leadership such as this is not normally considered a health base from which to rally, but bullishness has begun to broaden in June. Small-cap stocks, which were battered in the spring during the banking crisis, have begun to show life as the U.S. economy has proven more resilient than economists had forecasted. The Russell 2000 is higher by 6.63% so far this month. A rotation into value stocks, which are more economically sensitive, have also exhibited outperformance over their flashier growth stock peers, rising 3.00% month to date compared to growth stocks 2.20% rise. We’ve entered a period where investors seem entirely placated by a June Fed pause, moderating economic data and the belief the second half of 2023 will be strong. Absent any thematic concerns, the S&P 500 notched a 0.40% gain for the week, capping its fourth winning week in a row.
Consumer Demand for Services Cools
What had seemed to be an insatiable appetite for services now appears to be waning as U.S. businesses reported slower growth in May. The Institute for Supply Management’s Services Index eased to 50.3 in May, down from April’s reading of 51.9. Numbers above 50 indicate expansion while numbers below indicate contraction. A 3.2 point drop in new orders to 52.9 as well as employment slipping 1.6 points to 49.2 weighed down overall growth. However, the prices-paid index – a measure of inflation – showed price growth decelerating, falling to 56.2. That’s its lowest level since 2020. Despite May’s weaker than expected reading, it’s still too early to tell if this is a true slowdown or simply a pause prior to what is forecasted to be a strong travel and summer spending splurge.
Global Trade Signals Weak Goods Demand
High prices and borrowing costs have pushed demand for everything from electronics to furniture lower as consumers have increasingly opted for experiences over goods. China, one of the world’s biggest exporters saw exports drop -7.50% yoy to $283.8 billion in May, reversing April’s 8.50% rise. South Korea, another major exporter also reported exports dropped -15.20% in May on lower demand for computers and other electronic products. Despite weak demand in the short term, the magnitude of the declines is a function of the previous comparable periods unusual strength and manufacturers still seem confident demand for goods will rebound later this year as businesses look to re-stock for the holiday shopping season.
A slow news week helped stocks score another winning week. While the ISM services reading was weaker than expected, the services sector still managed to stay aloft and expand in May. The softer reading does suggest consumers are being impacted by high prices and borrowing costs, forcing them to mind their budgets more prudently, but the overall narrative remains that of moderation and not demand collapse. The jobs market and moderating inflation are likely to work in the consumers’ favor and remain supportive of continued spending on services during the historically busy summer travel season. All eyes now turn to next week’s Fed meeting. There is some debate to whether June becomes an enduring pause, or simply a skip before another 25 bps hike in July, but the mixed data almost certainly affords the Fed the opportunity to take a month to reassess. It would be unlikely for the Fed to surprise markets with a rate increase next week and with markets in rally mode and the VIX (a measure of risk concern) at the lowest point in over a year, investors seem awfully relaxed.
The Week Ahead
It will be a big week for investors as the Federal Reserve holds it June FOMC meeting. In economic news, inflation and retail sales take the stage.
Financial Literacy Education Expands Across U.S.
This week, the state of Connecticut signed legislation that made it the 21st state to guarantee a standalone personal finance course for high school students. Connecticut now requires students entering high school in the 2023-2024 school year to take a one-semester personal finance course. The course can fulfill existing graduation requirements within social studies or electives.
Financial literacy courses typically focus on the knowledge and concepts consumers need to manage their money and to build and protect wealth. It may include learning how to create and manage a household budget, learning how to invest money for retirement, or learning how to buy a house or start a business. It also can be part of an overall strategy to increase economic security for families and communities. Advocates note that teaching students important financial concepts such as borrowing, saving, consuming, investing, comprehending risk, income taxes, and other topics can help establish healthy financial habits early and help students avoid many mistakes that can lead to lifelong money struggles.
States play the lead role in kindergarten through 12th grade education, determining what students should learn and by when along with establishing the requirements for graduation. The 20 states that previously passed legislation to mandate personal finance education in high schools include Alabama, Arizona, Georgia, Idaho, Iowa, Kentucky, Michigan, Mississippi, Missouri, New Hampshire, New Jersey, New York, North Carolina, North Dakota, Ohio, South Carolina, Tennessee, Texas, Utah, and Virginia.
Advocates of teaching financial literacy in schools note that individuals today face more complex financial decisions than in recent decades. The shift away from pension plans to 401(k)s and other types of workplace savings plans puts the responsibility on workers to ensure they are saving enough. The tremendous debt levels we’ve previously written about in our market commentary, including credit card debt, student loan debt, and residential mortgages, also create a need for individuals to understand how much debt they can afford to take on and the consequences of not keeping up with debt payments. Furthermore, the Council for Economic Education (CEE), a non-profit focused on financial education in schools, reports on their website that individuals with low levels of financial literacy were five times more likely to be unable to cover one month of living expenses compared to people with high financial literacy levels. CEE also shares that nearly a quarter of millennials — individuals born in the 1980s and 1990s — spend more money than they earn.
Nan J. Morrison, president and CEO of CCE, says her organization has seen positive near-term signs from students who have received financial education. “In states with requirements, there is evidence that their students, in the years immediately following high school, have higher credit scores, lower loan default rates, and less credit card debt,” Morrison shared. There are also signs these students are making better decisions about financing college than students who have not had personal finance education.
Morrison also said, “Understanding the basics of personal finance unlocks a wealth of opportunities for life,” and we at Probity Advisors, Inc. couldn’t agree more. Our advisors frequently lead personal finance lessons for groups of both high school and college students, helping ensure future generations have the financial capability and knowledge to make wise decisions for themselves and their families. We regularly address personal finance and wealth management topics in our weekly commentary as well as in our planning guide to inform readers and our clients about strategies to preserve and protect wealth. If you have any questions about your financial situation and would like to speak with one of our advisors, please do not hesitate to call our office at (214) 891-8131.