June was another productive month for financial markets as major indices continued to make new all-time highs throughout the month.
The S&P 500 advanced around 3.5% and the NASDAQ jumped over 6%. Mid-caps shed 1.8% and small caps retreated close to 2.5%. The DOW, as well as the rest of the developed world (CWI), gained around 1%. Bonds were up around half of a percent and S&P equal weight (RSP) declined .5%.

TWG conservative, moderate and growth portfolios jumped 3.1%, 3.7% and 4.3% in June, handily outperforming their respective benchmark returns of 1.85%, 2.1% and 2.3%.
Solid quarterly performance of the TWG model portfolios enabled each model to outpace their benchmark for the quarter as well as YTD after fees:

  • TWG conservative portfolio 2Q gained 2.33% vs. 1.76% for its benchmark and 7.23% YTD vs. 6.97% for its benchmark
  • TWG moderate portfolio 2Q gained 3.02% vs. 2.15% for its benchmark and 9.27% YTD vs. 8.83% for its benchmark
  • TWG growth portfolio 2Q gained 3.3% vs. 2.5% for its benchmark and 10.5% YTD vs. 10.7% for its benchmark (sneak peek – the first week of July launched the growth portfolio to advance beyond its benchmark for the year by 1%!)

WHAT MOVED THE MARKETS
A handful of data throughout the month pointed to continued disinflation as well as signs of a slowing economy, helping pull forward anticipated rate hikes. A slightly weaker labor market and a tick higher in the unemployment rate also supports the narrative that the Fed is closer to easing their interest rate policy.

While a slowdown is welcome and frankly conducive to the economy (slowing enough to handle the last percent of inflation decline), said data was not weak enough to send caution of an imminent recession. As such, large cap growth gained the most as investors bid up the same mega cap tech stocks that have been supporting the market advances for some time.

PORTFLIO ADJUSTMENTS
Given the outsized moves in large cap, and QQQ, we incrementally increased exposure to QQQ during May and June. Every other position we held early in the quarter has been eliminated, and our portfolios are heavily invested in these large cap growth darlings, which has served us well.

You may ask whether such a high concentration in tech is risky. To that, we respond that our modeling process will reduce exposure when the pricing action suggests we lean out. This may occur in July or any other month of the year – or next year. We will continue to ride this trend higher until another area of the market shows greater relative strength. Thus, we are not concerned with our overconcentrated position in QQQ and will adjust accordingly at a time that the momentum starts to wane and demand shows up elsewhere.

For now, we are very pleased how we have gravitated towards the strongest area of the market, and, just as importantly, have avoided the worst areas.

LOOKING FORWARD
Earnings season kicks off this week, which should be the main driver of the market for the upcoming weeks.
Given the extended valuation of technology, they must post solid earnings growth to support their current multiples. We think this is highly likely, as corporate spend on tech and AI is, in our opinion, still in the early innings as companies continue to build out AI capabilities.

If you take out the top 10 largest US companies, the earnings multiple on the remaining 490 stocks are not extended and are much closer to the historical multiple of 16. Higher multiples of the largest 10 cause the multiple on the entire S&P 500 to be elevated, but understanding why should temper concern that the overall market is too expensive.

We will continue to monitor positions every day and adjust as necessary. It has been a nice month with much less frequent trading as the trend in mega cap tech continued almost unabated, and we are right there.
Enjoy the summer months – we’ll be back in touch with our July note.