June was a productive month for risk assets with 454 components of the S&P 500 up, versus 124 components up in May. All 11 sectors were positive. Consumer discretionary, industrials and materials gained more than the S&P 500, while utilities, communication services and consumer staples underperformed. InfoTech, financials, and energy performed in line with the S&P 500.
For the month, The S&P 500 and QQQ gained 6.4%, while small caps (IWM) caught up with an 8% surge higher. The DOW gained 4.5%, while global developed markets excluding the U.S. gained 4.2%. Bonds (AGG) declined .5%. Digging a little deeper, the S&P 500 equal weight (RSP) gained 7.4%, implying a broadening out of the market, as areas other than mega cap tech were being bought throughout the month.

For the month, TWG model portfolios performed in line with their benchmark and outperformed for the quarter net of fees:
TWG Growth (90% stocks/10% bonds) +5.5% for June, 7.19% Q2 (vs. benchmark 5.5% June, 6.4% Q2)
TWG Moderate (75%/25%) +4.68% for June, 5.76% Q2 (vs. benchmark 4.71% June, 5.24% Q2)
TWG Conservative (60%/40%) +3.71% for June, 4.52% Q2 (vs. benchmark 3.72% June, 4.07% Q2)
Moderate Smart Beta (75%/25%) returned 4.5% for the quarter.

WHAT DROVE THE MARKET
A slew of economic data and Fed Reserve policy positively impacted the market during the month. June payroll data showed more jobs created than expected but waning wage growth. This adds support to the durability of the economy yet implies that wage growth has moderated. This made bulls and bears happy.

CPI data continued to show a decline in inflation, rising only 4% over the past year, the slowest pace in more than two years. The widely awaited Fed policy meeting held rates steady for the first time in over a year of aggressive tightening. They did leave the door open for additional rate hikes later in the year, but we will take a pause as constructive, and signaling we are much closer to the end of the rate hike cycle. Powell testified in front of Congress and suggested that additional rate hikes may be needed this year to wrangle inflation, which was expected and a reiteration from Powell’s press conference the week prior.

As inflation continues to moderate (albeit slowly) and the unemployment rate has not ticked up meaningfully, it feels as if the market is accepting higher rates. The economy keeps humming along, supported by plentiful employment opportunities, moderate wage growth, and lower food and energy prices. To us, this bodes well to increase the odds that a hard landing may be averted.
What will be interesting ahead is whether inflation continues to recede, or whether we see an uptick in the months to come. The path of inflation should dictate whether the Fed feels it needs to keep raising rates. We can envision a hike in July and another pause in August, rinsed and repeated for the remainder of the year. In our opinion, this would be a prudent path to ensure inflation remains moving down to the Fed’s 2% target for the rest of the year and give the Fed more time to better evaluate the impact of the past year’s rate hikes.

PORTFOLIO ADJUSTMENTS
We continued to increase exposure to large cap tech via the NASDAQ 100 (QQQ), bringing the month end position to more than 50% of our equity exposure.
On June 1, we trimmed the two pacer funds, COWZ and GCOW and added the proceeds to S&P 500 (SPLG) and QQQ. We also rotated a portion of the Pacer funds (wich are more value oriented) to Vanguard Value (VTV). From June 1 to the end of the month, GCOW gained 2%, while COWZ and the S&P 500 gained 6%.
On June 2, we added to our S&P value position, SPYV. Given recent relative weakness in Europe, we evacuated our position in IEV on 6/7, and allocated the procceeds amongst SPYV and SPLG, and initiated a position into Mid Cap growth (IWP).

From 6/7 to the end of the month, IEV was flat while SPLG and SPYV gained 3.4% and 3% respectively.
On 6/8 we initiated a position in the Russell 1000 growth index, IWF, further increaseing our growth exposure.
On 6/20 we trimmed QQQ and repositioned the proceeds to SPLG.
ON 6/22 we evacuated the remaining position in COWZ and GCOW and trimmed MOAT. Proceeds were allocated to QQQ.

Our first trade into QQQ this year was on 3/22 and that tranche is up over 18%; subsequent purchases of QQQ are up between 4% and 17%. Cumulative gains in the QQQ as of the end of June stand at 8%. We Sold QQQ back on 1/14/2022 at $375 a share, and started buying back in this year at $310 a share, some 17% lower. Thus, we evacuated weakness and buying back in to strength. Selling at $375 and buying back at $310 is what our process is designed to do, selling high and buying low and avoiding areas of sustained weakness.

For the quarter, we eliminated our international exposure, reduced our large blend and sizably increased our exposure to growth. Since the modeling refresh in late march, we have been trading more frequently, but also more gradually. Given we are running 20+ models (were running six before), each model carries a smaller percentage of the portfolio so the adjustments are smaller and more gradual. This is exactly what we were intending for our strategy re-design, as we are now making more incremental moves to areas of strength, which effectively reduces the size and scale of the portfolio rotation. Models with greater sensitivities have generally lead the other strategies to move to the same place, but doing so more pragmatically and in more frequent intrevals. We have been very pleased in observing these adjustments, and the returns this quarter demostrate the benefits of the updated strategy. This revised, more “gradual” rotation within the portfolios should also significatny reduce the chance that we remain off sides like we did during March of this year, which set us back on our YTD and one year progress.

LOOKING AHEAD
As we enter the second half of the trading year, the immediate term market focus will likely be on upcoming 2Q earnings season, which kicks off next week. Even though we have had two consecutive quarters of negative earnings growth, the declines have been far less than expected. The market often trades on better or worse, not necessarily on good or bad. Thus, if earnings come in better than expectations, we can continue to see the market advance.

However, if earnings declines start to accelerate, then we could see the market take a step back, or at least pause. Given the fact that prices have increased for most components of the S&P 500 and earnings have been down slightly, the market has gotten more expensive than it was at the beginning of the year. This is called “multiple expansion” which means that the price to earnings ratio has increased due to price, not earnings growth. In order for current prices to hold, earnings will need to support this multiple expansion. If earnings are weaker than expected, then the market may sell off a bit due to sentiment feeling the pricing is too rich to justify given the current earnings. We will be keeping a close eye on this earnings season, and our process will recommend adjustments as necessary.

We could also see a “catch up” trade, where those areas of the market (and there are many) that have not kept pace with the gains of the S&P 500 become attractive to buyers. Should this scenario occur, we have an ample amount of ETF’s in our modeling inventory to allocate capital to any of these catch up areas, such as financials, energy and materials, which have significantly  underperformed given the rally has been mostly isolated to mega cap tech. Funds like COWZ, RPV, VTV and other more value oriented investments could be the next areas to which we rotate. Regardless of the path and participation of the market ahead, we have the tools to seek out exposure based on what is moving up more/down less than the broad market.
We have never been more confident about the durability of our modeling process, and with the increased line up of funds to choose from, we feel our process can successfully navigate any upcoming change of trends more quickly and smoothly than in the past.

Enjoy the summer months!