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This rally has a lot to prove — Week of June 5, 2023

Businessman presenting in front of team

Moving to the “Show Me” state

index wtd ytd 1-year 3-year 5-year index level
S&P 500 Index 1.88 12.35 4.29 13.37 11.29 4,282.32
Dow Jones Industrial Average 2.17 2.89 3.80 11.72 8.84 33,762.76
Russell 2000 Small Cap 3.31 4.60 -2.05 10.23 3.46 1,830.91
NASDAQ Composite 2.07 27.01 8.49 12.19 12.91 13240.77
MSCI Europe, Australasia & Far East -0.44 8.75 5.42 8.68 4.04 2,070.06
MSCI Emerging Markets -1.08 1.50 -6.44 2.57 -0.43 961.80
Barclays U.S. Aggregate Bond Index 1.47 2.69 -1.69 -3.56 0.93 2,103.76
Merrill Lynch Intermediate Municipal 0.81 1.42 1.28 -0.39 1.82 303.04

As of market close June 2, 2023. Returns in percent.

 Investment Insights

 — Steve Orr 


Show Me

We moved to Missouri. Last week we discussed the divergence between tech and the rest of the known world. Today we will run through more evidence of why this market needs to “Show Me” its rally is for real.

Granted, we are happy with the recent stock rally. March 13 marked the recent low for the S&P 500, at the height of the bank deposit issues with SVB. Since then, the S&P 500 has risen 9.9%, Mid-Caps 1.2% and Developed International 5%. Bank deposit flight and debt default fears are also largely dissipated, sending interest rates higher. Both asset classes were helped last Friday by a curiously strong jobs report. 

The debt deal signed by the President last Saturday allows the Treasury to increase borrowing starting Monday. The Treasury’s General Account fell below $40 billion last week, and they are targeting a balance of around $550 billion by the end of the month. Ergo, Bill and Note auction sizes will be increased, which could push interest rates slightly higher.

What’s Up

Fed speakers over the last couple of weeks goosed markets by implying a pause in rate increases would be a good idea. Given the year to year and a half impact lag of rate increases, we would agree. Last Friday, the BLS dropped a job bomb on the Fed with May’s employment report. If May’s payroll report of 339,000 net new jobs is accurate, that should change the Fed’s calculus a bit. Chairman Powell may have some restless members worried about continued economic strength and inflation pressures if these gains continue. 

We are growing a bit jaded about the Nonfarm Payroll Report. The 339,000 figure was well above the 195,000 average estimate. This marks the fourteenth straight month that the Administration’s figure has topped economists’ forecasts. The previous record was five, back in the recovery period of 2020. The Household survey fell by 310,000 and the number of unemployed rose by 440,000. These figures pushed the unemployment rate higher by two-tenths to 3.7%. Those job declines more closely match layoff headlines and weakness indicators we watch. Two-tenths may not seem like much, but it is on the way to ½%. The recession indicator called the Sahm Rule states that the economy may enter a recession when the three-month average unemployment rate rises ½% or more above its 12-month low (4.0% today). Bloomberg economists applied the rule to state employment data and calculated last week that 16 states have unemployment increases that meet that rule. 

While we wonder what’s up with the employment data, the tech sector’s rise is no wonder. Over $5 trillion in stimulus liquidity is still sloshing around the financial system. Artificial Intelligence is the new meme of the moment. We will not dwell too much on A.I. other than to say our graduate coursework showed immense potential for improving repetitive tasks that have some well-defined decision paths. Headline job growth also helps confidence, if nothing else. 

Middle ground

June marks the middle of the year’s performance race. A 50/50 stock/bond portfolio has returned about 5%, not bad at all after 2022’s worst year ever. Blowing the dust off our trusty Stock Trader’s Almanac, we find that pre-election Junes are good for NASDAQ stocks, averaging about an 0.8% gain. Of course, we blew through that level last Friday — month-to-date the NASDAQ is up 2.4%. After a hectic first couple of trading days, most pre-election Junes settle into a listless drift for the middle weeks and ends with a rally. Friday, June16 is a triple witching expiration day, so that week may see more price action than usual. 

Despite the debt deal relief rally, stocks still have a lot to prove to us. Fifty-two-week new lows continue to run above 52-week new highs, some days double or triple the new highs. Dow Transports have attacked their 200-day moving average nine times over the last 14 months and failed every time. The broader economy is living a different life than the charmed NASDAQ. There are still more losing stocks this year than winners in the S&P 500 index. 

We are not in the all-hope-is-lost Bear camp, by any stretch. Since World War II, there are 13 periods where the S&P 500 has fallen 20% in a cyclical Bear and then gone seven months without retesting the lows (last October). After that seven-month mark, the S&P 500 was higher six and twelve months later 12 of 13 times. The one outlier? 2001 into 2002 after the dot.com tech meltdown. 

Go home?

What would send us back home to Texas from our mental “Show Me” state? Small and emerging markets outperforming. China re-opening actually re-opening. Commodity prices turning higher thanks to rising demand. OPEC not cutting production due to bloated inventories. Consumer income rising above spending as inflation moderates. Our Astros taking over first place. What are the chances of these things happening in our “high” economic case? Nonzero but not very big! Back in St. Louis, Forest Park Avenue stretches for miles through the city, a line of red traffic lights into the distance. They remind us of the red indicators ahead in our economic forecasts. 


Markets need to show us the rally is real. That starts with strength down the market-cap stack and financials. Part of the weakness in banks stems from fears that regulators will raise capital requirements on larger banks. If that does happen, it will take months — slowing any bank stock rally.

The economy is chugging along in second gear. Not too fast and not too slow. Perhaps the red indicators on our economic forecast dashboard need to prove a few things to us, too.

Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. Steve has earned the right to use the Chartered Financial Analyst and Chartered Market Technician designations. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary’s University School of Law. Follow him on Twitter here

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