Market Commentary — June 20, 2023

Despite a multitude of headwinds, the bull market rally marches on. The S&P 500 Index tallied its longest stretch of daily gains since November 2021, posting its best weekly performance since the end of March. Market breadth narrowed a bit last week, with a renewed focus on large-cap growth stocks.

One factor sparking a market rally in the second half is FOMO (Fear of Missing Out) with almost $6 trillion sitting on the sidelines in money markets and most managers positioned conservatively, waiting for a recession in the first half of the year that failed to materialize.

Equity investors did “go away in May”, with ETFs and Mutual Funds experiencing over $23 billion in outflows and US equity funds taking the brunt of the share. But digging into the details, evidence of FOMO was clear, with large-cap value suffering its worst month of outflows, ($15.1 billion) on record.

Last week’s economic data supported a continued “Goldilocks” expansion coupled with falling inflation. On Tuesday, the Labor Department announced CPI increased 4% YOY. That is still double the Fed’s 2% target, but a big drop from April’s 4.9% level. Adding to the good inflation news, was Thursday’s 0.3% decline in producer prices, marking its 4th decline over the past 6 months.

Meanwhile, the University of Michigan’s gauge of consumer sentiment rose more than expected, hitting its best level in four months. Weekly jobless claims remained unchanged, however, missing consensus expectations for a decline from the previous week’s 20-month high.

All of this hopeful data helped investors digest the hawkish Fed language accompanying June’s interest rate increase pause announcement. Markets keep tuning out the Fed’s hawkish rhetoric, even though the Fed is now telegraphing two more rate increases by the end of the year. Really?

We added Senior Bank Loan exposure to our fixed-income ETF models a few months ago, and that has worked out quite nicely in this “Goldilocks” environment.

The big news in ETF land last week was BlackRock’s filing for a spot Bitcoin Trust. This is not a GBTC-like trust but rather more like a GLD, ETF trust structure with creates and redeems. But there are a few unique aspects of the filing. Coinbase would be the crypto custodian, but more interesting on pg. 36 is that NASDAQ, the filing exchange, would enter into a “surveillance-sharing agreement” to “detect, investigate, and deter fraud and market manipulation.”

Is this finally the language and structure the SEC has been waiting for, offering the SEC a regulatory path to approve a spot Bitcoin ETF product? BlackRock’s record of ETF approval is 575-1, denied only once in October 2014, when the company sought permission to create actively managed ETFs that would not require disclosures of holdings on a daily basis.

Active ETFs have snagged 1/3 of the new ETF money flows this year, even though they only make up 6% of total ETF assets. Why? They are the cheapest and most tax-efficient way to own active strategies. And for the most part, they are transparent, finally removing the egotistical veil of secrecy (that’s coming from a former active manager).

Hope you all had a wonderful Father’s Day and Juneteenth weekend. And now we have a short week and the sun is finally out in Southern California. No more June gloom!

Jane Edmondson
CEO and Co-Founder

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