Market Commentary — June 12, 2023
Last week, the S&P 500 officially entered a bull market, up more than 20% off its mid-October lows. What is even more notable is that market breadth is also improving. Small caps outpaced large caps, and value shares outperformed growth names last week.
As a result, last week, equal-weighted versions of the S&P 500 outperformed by the largest margin since late March. But YTD, the S&P 500 Equal Weight is only up 3.3% versus 12.8% for the S&P 500 TR. By comparison, our XOUT US Large Cap Index, which eliminates the bottom 250 names of the broad market index and up weights the remainder on a capitalization-weighted basis, is up a whopping 19.2%. So maybe the answer is not just more breadth, but also “eliminating the losers.”
Apple received a lackluster response to its first major product announcement in several years, a $3500 virtual reality headset. I have seen some funny comments on social media – “The only thing I see with my new Apple headset is my spouse about to divorce me.” This piece of humor, speaks to the luxury excess at a time when many consumers are scaling back tech purchases.
Oil prices rallied early last week on news that Saudi Arabia announced a unilateral production cut. The Saudis will be cutting oil production by one million barrels a day starting in July. Just in time for summer!
There was not much economic news last week ahead of the Fed’s policy meeting and rate announcement this Wednesday, except for Thursday’s jobless claim data showing a spike in claims to 261,000, surpassing levels not seen since October 2021. But continuing claims fell back unexpectedly and hit their lowest level in nearly four months—so more mixed and confusing data on the jobs front.
There was also evidence of a large contraction in the services sector, but that was good news for investors as it comes with a decline in service prices. The Institute for Supply Management’s gauge of prices paid for services moderated to its lowest level since May 2020, falling to 50.3, indicating flat growth (levels over 50 indicate expansion).
In ETF news, Fidelity announced it was converting 6 thematic-themed mutual funds totaling $400m in assets to ETFs. While the ETFs have a 50 bps expense ratio, the composite fund of funds version has zero fees.
KraneShares had a new filing: the Global EM Revenue Leaders Index ETF, giving exposure to global companies with at least 30% of their revenue from China and at least 50% from EM. Hong Kong shares are excluded.
And Defiance is coming out with a Pure Electric Vehicle ETF (EVXX) that offers super concentrated (5 stocks) exposure to the 5 largest EV vehicle manufacturers in the Solactive Pure US Electric Vehicle Index, equally weighted. This approach is similar to Roundhill’s BIG series of ETFs. So far they have BIGB (Banks) and BIGT (Tech), with more on the way.
All of this calls to question how much diversification is a good thing – especially with assets that are highly correlated. Academic literature advocates for diversification as an important component of risk control, but a few concentrated bets might provide a nice source of satellite alpha as part of a diversified portfolio of ETFs. I just worry that some investors might be too “all in” or trying to time these concentrated bets, similar to leveraged and inverse plays. So investors should use these vehicles with caution!
All eyes will be on this week’s Fed decision. The CME FedWatch tool is currently pricing in a 70% likelihood of no change in rates – a pause. We shall see! And to all my East Coast friends, here’s to clearer skies for you!
And oh yes, in case you didn’t notice, we just launched our latest index – The MUSQ Global Music Industry Index!
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