ND & S Weekly Commentary 5.1.23

Markets Results Mostly Higher on the Week      

Equity markets were generally higher last week with investors favoring larger companies, tech and developed economies.

For the week, the DJIA added 0.86% and the S&P 500 moved 0.89% higher.  The tech-heavy Nasdaq had was even higher adding by 1.28%.  The MSCI EAFE Index also continued moving higher adding 0.17% while emerging market equities (MSCI EM) dropped 0.27%.  Small company stocks, represented by the Russell 2000, retreated 1.24%. Fixed income, represented by the Bloomberg/Barclays Aggregate, finished higher by 0.83% for the week as yields moved slightly lower.  As a result, the 10 YR US Treasury closed at a yield of 3.44% (down 13bps from the previous week’s closing yield of ~3.57%) as investors reacted to lower-than-expected GDP results and perhaps some bias towards the Fed being less hawkish. Gold prices closed at $1,983/oz – up 0.18%.  Oil prices continued to move lower by 3.99% to $74.76.

The major macro-economic news last week was GDP being revised down from 2.6% to a 1.1% growth rate in Q1 and inflation numbers showing more stubbornness. US Core PCE increased 4.6% year-over-year and the Department of Labor’s employment cost index increased 1.2% quarter-over-quarter.  Both were higher than the expectations of 4.5% and 1.0%, respectively.  The PCE numbers are of greater importance to the Fed’s thinking than are the CPI and other inflation measures or indicators.

Despite the evidence that the economy is slowing, and inflation is declining at decreasing rates, investors seem more focused on recent earnings results.  While earnings are not spectacular, they are not horrible either and that seems to be good enough for the optimists who seem tired of the dark ideas of interest rates being higher for longer and an inevitable recession.

Earnings results, outlooks and forecasts will continue over the next few weeks.  So far, about 50% of the S&P earnings are reported and about 79% have beat their earnings estimates, although most companies had tempered their outlooks in the previous quarters.  So, good news on the beats, but few were working off a high bar.

The big, planned event this week is the Fed’s interest rate statement and Chair Powell’s press conference on Wednesday.  Expect a 25bp hike despite a big, unplanned event of the third major bank failure over the weekend. (The FDIC seized First Republic over the weekend and JP Morgan bought it from the FDIC – ho, hum, that’s what we do.).  The Fed’s statements, while always important, will be parsed and analyzed as to whether this is the end of the rate increase cycle and how long will the Fed pause before taking any further action.  The consensus is its next action will be a cut, but opinions on when that happens are so diverse, there really is no consensus.

The financial markets do not always make sense in the near term. We are in a period where that appears to be the case. To reduce inflation, the Fed is working to slow the economy. Indications are the economy is slowing, but inflation is now being stubborn after an initial drop from relatively high levels. All this points to the need to squeeze growth for longer.  Despite this, stock indices have moved and are moving higher. We are not excited about chasing equity prices at this juncture. Sticking to long term strategic allocations to equities will always beat trying to time it.

“History provides a crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.”  –  Shelby M.C. Davis