Stock market sentiment improved in the second quarter of 2023. Turmoil stemming from U.S. and European bank failures and a potential default on U.S. government debt proved transitory. Major central banks slowed their pace of rate hikes or even hit the pause button but signaled that they stood ready to tighten monetary policy further to bring down inflation. With interest rates not expected to go much higher and amid resilience in labor markets, consumer spending, and overall economic growth, investor concerns about a possible global recession appeared to ease. Stocks finished higher, with equities in the United States showing more strength than those in Europe, Asia, and emerging markets.
The inverted Treasury yield curve steepened further, but overall, yields of U.S. bonds finished higher and their prices lower. The broad U.S. investment-grade bond market, as measured by the Bloomberg U.S. Aggregate Float Adjusted Index, ended the quarter in negative territory. Broadly, shorter-duration bonds posted slightly higher returns than longer-duration bonds, and lower-credit-quality bonds fared better than those of higher credit quality.
U.S. bond market
- The broad bond market returned –0.86% for the quarter, as measured by the Bloomberg U.S. Aggregate Float Adjusted Index. The Bloomberg U.S. Corporate Bond Index returned –0.29%, compared with –1.38% for the Bloomberg U.S. Treasury Index. Within the corporate sector, bonds of financial institutions (+0.21%) outperformed those of industrials (–0.44%) and utilities (–1.19%).
- The Federal Reserve approved an interest rate hike of 0.25 percentage point in May. The increase brought the federal funds rate target to 5.0%–5.25%. The yield of the bellwether 10-year Treasury note finished the quarter at 3.84%, up from 3.47% three months earlier.
- For the 12 months, the broad U.S. bond market returned –0.85%.
U.S. stock market
- For the quarter, the broad-market Russell 3000 Index returned 8.39%. Large-capitalization stocks outpaced mid- and small-caps, and growth stocks outperformed value stocks.
- For the 12 months ended June 30, the Russell 3000 Index returned 18.95%, with technology, consumer discretionary, and industrials the strongest-performing sectors.
- Money market yields rose during the quarter. As of June 30, the monthly SEC yield on Vanguard Federal Money Market Fund was about 5%, with a weighted average life of 46 days. The fund maintained its high-quality portfolio and continued to benefit from broad diversification and low fees.
International stock market
- Stocks from the Pacific region (+3.20%) outpaced those from Europe (+2.84%) and emerging markets (+1.05%) for the quarter.
- For the 12 months, stocks outside the United States returned 12.76%, as measured by the FTSE All-World ex US Index. Industrials, financials, and consumer discretionary were the strongest-performing sectors.
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