Wall Street proved resilient during the second quarter of the year, despite rising inflation, two interest rate hikes, and concerns about the debt ceiling. The economy remained relatively strong, despite predictions that it may be headed toward a recession. The second quarter saw information technology, communication services, and consumer discretionary account for most of the market gains. Energy, utilities, health care, financials, and consumer staples slid lower. The market’s positive performance during the second quarter was buoyed by strength in the labor market, economic data that may be showing inflation is beginning to wane, and a better-than-expected first-quarter gross domestic product.

Government bond yields rose in the second quarter, with investors eyeing the relative strength of the economy as reason to remain bullish on stocks. Each of the benchmark indexes listed here climbed higher in the second quarter, with the Nasdaq enjoying its third-best first half on record, a far cry from last year at this time, when the tech-heavy index was going through its second-worst six-month stretch. The S&P 500 also enjoyed notable growth in the second quarter. The dollar inched higher while gold prices retreated in the second quarter. Notwithstanding a roughly 4.0% increase in June, crude oil prices declined for the fourth consecutive quarter, marking the longest losing streak since 1988. While indications seem to point to a more bullish outlook, crude oil supply continued to outpace demand, muting prices. OPEC+ cuts were offset by production increases from other sources, including the United States. In addition, China’s demand has been weaker than anticipated, with manufacturing slow to expand. Prices at the pump rose in the second quarter. The June 26 retail price for regular gasoline was $3.571 per gallon, $0.15 above the March price of $3.421 per gallon. However, gas prices are down $1.301 over the last 12 months.

Navigating Market Concentration and Client Conversations

Market Concentration and Tech Dominance
Many advisors have been grappling with inquiries from their clients about the recent market performance. Although the first half of the year witnessed an upward trend, it is important to understand the underlying dynamics. The market has been heavily concentrated, driven primarily by a handful of tech stocks. In fact, out of the top 500 companies in the S&P 500, only seven stocks have experienced significant gains, while the remaining 493 have barely broken even, as indicated in the below chart. This concentration has made the market highly sensitive to tech-related movements, particularly in the NASDAQ.
Source

Examining Historical Bear Markets
To provide context and help clients understand the potential implications of market concentration, it may be helpful to draw parallels to previous bear markets. Charts showcasing the rebound patterns observed during the 2000 and 2008 bear markets illustrate the importance of assessing broader market health before confirming a new bull market. These historical examples remind us that bear markets often involve several market rallies and false recoveries before a sustained upward trend emerges.

Data through September 29, 1999 through June 2, 2003
Source: Beacon Capital Management, Inc.

Buyback Considerations and Positioning
While the buyback trigger has not yet been reached for Vantage 2.0, we continue to monitor market conditions closely. Currently, we believe the market stands at an inflection point, and the direction it takes will determine the appropriate course of action. If the market broadens and becomes healthier, participation through the buyback strategy becomes more likely. Conversely, if market concentration persists and recession looms, a conservative approach will prove advantageous.

If you have clients looking for more active exposure to participate in the current market, Beacon’s Vantage 3.0 portfolios may be an option to consider with their agile investment approach of targeted loss-reduction protections at the sector level.

Upcoming Considerations
Looking ahead, the upcoming Federal Reserve meetings may have a heavy impact on the market in the coming months. While a quarter-point rate increase in the next meeting is widely anticipated, the Fed’s comments and future plans hold the key to market sentiment. The labor market is a crucial factor influencing the Fed’s decision-making process, as employment rates and wage growth impact spending and inflation. The Fed is closely monitoring the labor market and may seek to slow down spending without causing significant harm.

Conclusion
The resolution of the debt ceiling issue and marking the end of the COVID-19 pandemic met with signs of economic slowdown and inflation have contributed to the market’s mixed performance in the first half of the year.

By understanding market concentration, historical patterns, and upcoming factors, advisors can provide valuable insights to their clients. Navigating the inflection points and making informed decisions will be critical as the market continues its evolution.

For more insight on navigating client conversations regarding the market and Beacon portfolios, please do not hesitate to reach out to a Beacon wholesaler.

As we get closer to the transition of TD Ameritrade Institutional (TDAI) accounts to Schwab Advisor Services, please note the following key communication timelines and reminders:

Client Communications sent on June 30, 2023:

• TDA Conversion – Client Letter
• Key Info Account Transfer to Schwab

Upcoming TDA/Schwab Communication Schedule

The transition is scheduled to take place during Labor Day weekend, starting 8:30 P.M. ET, September 1 – 5:00 A.M. ET, September 5. Clients and advisors will not have access to accounts during this time.

We encourage you to remind your clients that their relationships with you as their advisor will not change, and there won’t be any changes to fees assessed to their account each month. Keep an eye on your inbox for more updates and reminders in the coming weeks.