Gill Capital Partners Fourth of July 2023 Update

Happy Fourth of July to our friends, clients and partners. We hope you are able to take some time to celebrate this holiday. We want to provide a brief update on current happenings in the economy and markets for you to chew on in between bites of hot dog and fireworks. With inflation moving in the right direction, the market has generally been in a bullish uptrend, despite interest rates at multi-year highs and a Federal Reserve warning of more hikes to come. Not all markets are participating to the same degree, however, as huge performance in a handful of tech stocks is driving the majority of the performance. We will get into all of that and more, but first, the interesting factoid of the month.

Teenagers are doing just fine this summer!

Gusto, which is a payroll provider, recently reported that hourly wages for their teenage segment (ages 15-19) hit $14.89 in May — up 41% since January 2020! Teens are anticipated to make up nearly 20% of all hires this summer.

Federal Reserve & Inflation Updates

At their most recent meeting, Federal Reserve officials announced a pause in interest rate hikes, holding rates at 5% to 5.25% after more than a year of consecutive rate increases. This decision, made by the Fed’s Federal Open Market Committee (FOMC), marks a shift in how Federal Reserve officials view inflation, which reached a 40-year high of 9.1% in June last year as food and energy costs soared. Inflation in May was down to 4%, the lowest since April 2021. The FOMC said in a statement, “Holding the target range steady at this meeting allows the committee to assess additional information and its implications for monetary policy … In assessing the appropriate stance of monetary policy, the committee will continue to monitor the implications of incoming information for the economic outlook.”

While Fed officials decided to pause for now, they suggested that further increases may be coming, depending on how close the economy gets to their target of 2% inflation. At a press conference on Wednesday following the Fed’s announcement, chair Jerome Powell said that further rate increases were “likely.” Nearly all committee participants indicated that they view it as likely that further rate increases will be necessary this year to bring inflation down to 2% over time, Powell said, before warning that inflation was still a problem in the US economy. He added, “Inflation has moderated somewhat since the middle of last year; nonetheless, inflation pressures continue to run high and the process of getting inflation down to 2% has a long way to go.”

Our view –As you can see in the chart below, headline inflation on a year-over-year basis has been trending consistently lower, with energy inputs experiencing outright deflation while the stubborn shelter inputs remain high.

We anticipate that inflation will continue to move lower towards the Fed’s target, and we could see significant decreases in the months ahead as the data is being referenced against huge increases from a year ago. This is good news, and higher rates are working to bring down the pace of inflation. The Federal Reserve’s pause is well timed, and will allow them to assess the impact of their work from the past year. They are letting markets know that they will raise rates a bit further if necessary, but clearly we are at or near the end of the interest rate hiking cycle, and the markets like that. This has been a lot for the economy to digest and a pause here seems like a good decision. Markets are no longer pricing in rate cuts this year, which is in line with the Fed’s desire to hold rates at these levels for the forseeable future.

Market Update – Not all indexes are the same…

As of this writing, the S&P 500 index is up approximately 14% this year, while the Down Jones Index is up less than 3% and the Nasdaq is up 27%. Markets are off to a good start, but not all stocks are participating to the same degree. In fact, a handful of tech stocks are responsible for the majority of the gains, with names like Nvidia, Microsoft, Alphabet, Apple, and Meta up significantly this year. The remainder of companies in the S&P 500 are showing more modest gains. The S&P 500 Index is a market weight index, which means that companies are weighted in the index in proportion to their market capitalizations. With tech valuations skyrocketing, the index is concentrated heavily in a handful of very large companies. In fact, the top five names in the S&P 500 (Apple, Microsoft, Amazon, Nvidia, Alphabet) account for over 23% of the index weight, leaving the other 495 companies to comprise the remaining 77%. So far in 2022, these top five companies have seen tremendous moves higher in their stock prices, driving the index disproportionately higher.

If we were to look at the S&P 500 equal weight index, which weights each of the companies in the S&P 500 equally, we would see a very different picture. This index is only up 4% so far this year, as compared to 14% for the more commonly referenced S&P 500 Index.

Our view – Big tech is winning big right now, and market performance is concentrated heavily into a handful of names that are well capitalized and heavily involved with AI and automation. The prospect of AI is driving big moves in many of these names and pushing these stocks to lofty valuations. The market is extremely excited about what AI can do as it sees the potential for significant automation, cost savings, and profit centers ahead for big tech. Some of these names may be getting a bit ahead of themselves as the market is still figuring out how to use AI responsibly and profitably, but, like it or not, AI is here to stay and will be hugely impactful moving forward. We generally construct portfolios with diversification in mind in order to avoid concentrated bets, providing broad based diversification across industries and geographies and periodically rebalancing to provide the best long term returns, as opposed to chasing hot stocks or sectors.

Have a happy and safe 4th of July, and don’t feel too bad for those high school kids that are working over the long weekend – they are doing just fine!

As always, please let us know if you have any questions or concerns, or if we can provide assistance with any other financial planning matters including education, taxes, insurance or estate needs.