ND&S Weekly Commentary 7.3.23 – Stocks Still Higher as First Half of 2023 is in The Books

For the most part, stocks gained again last week, and bonds saw prices decline as investors demanded more yield.

On the week, the S&P 500 gained 2.36% and the DJIA added 2.02%. The tech-heavy Nasdaq moved higher by 2.20%. International equities were mixed with developed markets (MSCI EAFE) up 1.67% and emerging markets (MSCI EM) flat at 0% return. Fixed income, represented by the benchmark Bloomberg U.S. Aggregate, was off 0.26% last week as yields shifted higher across most of the curve. The benchmark 10yr U.S. Treasury yield closed at 3.81%, up from 3.74% the week prior. Gold and Oil (WTI) were both up just slightly last week, closing at $1,912/oz. versus $1,931 for Gold and $69.86 versus $69.51a barrel for Oil.

The big numbers for the week include a revised GDP number coming in at 2.0% against a forecast of 1.6% and a previous period of 1.3%. Bonds reacted to this since this relatively hot GDP number was not expected and supports a hawkish tone towards interest rates. A rise in consumer confidence, initial jobless claims below estimates and some housing data that indicated less cooling than anticipated all support the notion that the economy is showing resilience towards efforts to slow things down.

At the end of the week, the PCE numbers (the Fed’s preferred measure of inflation) were on target, but the targets support the view that inflation is resisting efforts to curb it (PCE was up 4.6% over the past year). These “sticky” levels of inflation correlate with the Fed’s comments that we should expect rates to be higher for longer.

The bond market seemed to react to this data…the stock market, not so much. Stocks are plodding higher, raising price multiples, against the backdrop of an interest rate structure that challenges those multiples and the clear indications from the Fed that it will do what it must to curb inflation – which is to slow the economy. When the economy slows, it has a direct impact on corporate revenues. When revenues stop growing or decline, the only way to avoid an impact to earnings per share is to improve margins (% of revenue that becomes earnings) or reduce the number of shares. Margins are at historically high levels and a new 1% federal excise tax may curb the buyback appetite. So, a bit puzzling is this equity market.

Economic data coming in this holiday-shortened 4th of July week includes trade deficit, ISM manufacturing and construction spending data, jobs and unemployment data, and the release of the FOMC Minutes from the Fed’s June meeting.

The Fed’s next meeting (July 26-27) and the signals it sends ahead of it could be interesting. The consensus view is that markets are pricing two more 25bps hikes this year, but not necessarily any action at the next meeting. The Fed does not seek to surprise investors, so expect to hear messages that do not contradict this approach unless the attitude to be more aggressive in July or September is growing; listen for those indications in the commentary.

With July getting underway, summer is finally here! We hope you have some great fun and enjoy some of the best weather of the year this summer.

“The waiting is the hardest part.”Tom Petty