What’s trending in the market:

Inflation, inflation fears, and reflation were the headlines of most news concerning the market for the past month. Every economist or investor had that topic in mind, especially with the recent talk prior to the Fed meeting that took place on June 16^th about the future of the Fed’s policy and how would the markets react to any decision the Fed will undertake.

The federal reserve meeting indicated the Fed’s future plan for the coming two years, where the Fed tilted to a hawkish view and signaled an earlier than expected rise in interest rates; which would happen as early as in 2023. The Fed also indicated that there might be two rate hikes at that time. This was not what the market anticipated, as this was a signal from the Fed that the rates need to rise sooner than expectations. It is worth noting that in March the Fed signaled that there would be no increase in rates until after 2023.

In addition, the Fed also raised its headline inflation expectation to 3.4% for the year, which is higher than the forecast it provided in March by one percentage point. Powel said during the meeting that ‘inflation could turn to be higher and more persistent than we expect’. However, there has been an insistence by the Fed that inflation is transitory, and not here to stay, in a statement released post-meeting.

The end of June brought some good news for the United States economy, as president Biden was able to strike a $579 billion infrastructure deal with a bipartisan group of senators. It is anticipated that the deal would help expand the economic recovery and further reduce the unemployment rate in the US. However, one challenge remains in how the deal would be financed.

Market performance and reactions:

Dow Jones Industrial Average

Throughout the beginning of June, the Dow Jones Industrial Average was consolidating between a price level of 34,849 and 34,328, then began drifting downwards in a move that lasted for two weeks and was strongly supported by the outcome of the Fed’s meeting. The index ended up reaching a low of 33,271 and recorded its worst week since October 2020. In the final trading days in June, the Dow Jones Industrial Average made a strong rebound back up, reversing more than 1250 points of its losses, but still didn’t reach its peak levels at the beginning of the month.

Nasdaq Composite

As for the Nasdaq composite, a completely different Scenario was in place. The composite started the month with a low of 13,548 then bounced back up, forming a strong uptrend movement that lasted for almost the entire month.  The Nasdaq composite was less affected by the Fed’s meeting outcome than the Dow Jones, as the index didn’t see any heavy declines and kept scoring new all-time high levels. Towards the end of June, the index reached a new record high of 14,535, due to a strong rebound in tech shares, mainly Facebook, Microsoft, and chip makers such as Nvidia.

S&P 500

The S&P500 index started the month on a positive note, climbing up to a new record high of 4,257. However, after the Fed’s meeting, the index dropped more than 90 points to reach a low of 4,164, but the drop was less severe than the Dow Jones, as technology stocks helped lessen the fall of the S&P500 index. Towards the end of June, the index rebounded strongly, reaching a new all-time high of 4,302, supported by a strong rebound in blue-chip stocks.

VIX Index

The VIX, also known as a gauge of fear among market participants, has been falling over the past couple of months as the economic recovery is taking place and investor’s confidence is boosting markets. The index has reached its lowest level since the pandemic began, reaching a low value of 14.10. This in turn further supports the strong rebound is US equities and major indices throughout June.

Yield Curve

Following the Fed’s meeting, yield curves flattened, meaning that yields on longer-dated bonds had declined while yields on shorter-dated treasuries have increased. The higher than expected inflation expectations caused the longer-term yields to decline. Yields on Shorter-dated Treasuries rose as the Fed signaled a sooner than expected increase in interest rates since these yields are more sensitive to interest rate changes. 

Year to date recap:

*As of June 30, 2021.

Conclusion:

Over the course of the past three months, the stock market witnessed different movements in stock prices among various sectors that have been caused by different factors including fears of excessive valuation in technology stocks, growing inflation fears, and rising yield curves. The result is a clear sector rotation taking place in the stock market between the period of March till May. Technology stocks saw Major sell-offs and the Nasdaq composite scored its worst values in months following rising yields and a growing fear of a rise in inflation levels in the US. On the other hand, industrials and financials picked up pace as investors poured their money into these stocks; as shown by the strong uptrend in the Dow Jones Industrial Average during the same period between March till May. However, this rotation reached its end towards the end of June, as Technology stocks were back up and industrials saw a hefty downturn. This rotation between technology and growth stocks to industrial and financial stocks appears to have been caused due to fears of overvaluation in Technology stocks. If these stocks kept trading at the previous pace of the last year, the performance of the Nasdaq composite would outpace that of other indices.

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Disclaimer:

This report was produced by the dealing department and does not imply any financial advice.

The data collected in producing this report is gathered from various trusted sources in order to provide the best independent information possible throughout the report.