Weekly Market Update – May 12, 2023

Quick Takes

• Earnings season wrapping up leaving markets more focused on the economy, the banking system, the Fed, and the debt ceiling. Consumer sentiment and business optimism both fell more than expected indicating pessimism for those major issues.
• Markets were mostly down for the week, with stocks and bonds losing ground. The S&P 500 and Russell 2000 fell -0.3% and -1.1%, respectively, but the Nasdaq bucked the downtrend for a second straight week with a +0.4% gain. Non-US stocks were down -0.9% for the week.
• Treasury yields rose with the 2-year yield up +7 basis points (bps) for the week and the 10-year yield up +3 bps. For the week the Bloomberg US Aggregate Bond Index slipped -0.2% and the Bloomberg Global Aggregate ex-US Bond Index was down -0.7%.

Economy and debt ceiling concerns sink stocks and bonds

Earnings season is almost complete leaving markets more focused on the economy, the banking system, the Fed, and the debt ceiling. Signs of concerns over a potential recession persisted with the University of Michigan Consumer Sentiment Index preliminary report falling more than expected to a six-month low. Businesses are also increasingly pessimistic with the NFIB Small Business Optimism Index sinking to its lowest level in a decade. Stocks had gained earlier in the week after the April Consumer Price Index (CPI) showed headline inflation, and core inflation, rising slightly less than expected. But on Friday, the University of Michigan report showed five-year inflation expectations higher than expected and Import Prices rose for the first time this year.

For the week, most major global stock indices were down. The S&P 500 and Russell 2000 fell -0.3% and -1.1%, respectively. Once again though, the Nasdaq bucked the downward trend with a modest +0.4% weekly gain. That was enough to help keep the Nasdaq Composite out of bear market territory as it is now up +20.3% from its closing low of 10,213.29 on December 28. Officially, the Nasdaq exited its bear market on Monday, meaning it took just 89 trading days to get out of the bear market – the first major market index to do so. The Nasdaq Composite measures the change in more than 2,500 stocks listed on Nasdaq Stock Exchange but is heavily dominated by the technology sector. Like the S&P 500, international stocks fell, with MSCI EAFE Index, which represents non-US developed market stocks, and the MSCI Emerging Markets Index both down -0.9% for the week.

Bonds were also down for the week as the Treasury yields rose. The 2-year Treasury yield was up +7 basis points (bps) for the week to end at 3.99%, while the 10-year Treasury yield gained +3 basis points to finish at 3.46%. For the week the Bloomberg US Aggregate Bond Index slipped -0.2% and non-US bonds, measured by the Bloomberg Global Aggregate ex US Bond Index, were down -0.7%.

Chart of the Week

The National Federation of Independent Business (NFIB) Small Business Optimism Index for April decreased 1.1 points to 89.0, below expectations of 89.7 and 90.1 in March. April marks the lowest reading since 2013 as recession risks and credit conditions weighed on business owners. Breadth was negative with six of the ten inputs of the headline optimism number moving lower while only four rose. Notably, it was the first time since January of 2022 that Inflation is no longer the topmost important problem among respondents. In fact, inflation as the single most important problem in operating their businesses fell to its lowest level in 15 months. It is still in second place with 23% of respondents citing it as the top problem, but Labor Quality has become the new single biggest business problem with a 24% response rate. Only a net 3% of respondents said Now is a Good Time to Expand. Expected Credit Conditions remain unfavorable as banks have tightened lending standards in light of recent bank failures. Most businesses are finding it more difficult to get a new loan compared with their previous one. “Optimism is not improving on Main Street as more owners struggle with finding qualified workers for their open positions,” said NFIB Chief Economist Bill Dunkelberg. “Inflation remains a top concern for small businesses but is showing signs of easing.”

Business Optimism Plunges to the Lowest Level in a Decade.
NFIB Small Business Optimism Index

Source: National Federation of Independent Business, Macrobond.
Note: shaded areas represent U.S. recessions.

Economic Review

• The Consumer Price Index (CPI) rose +0.4% in the month of April, in line with expectations, and up from unrevised +0.1% in March. Year-over-year (YoY), consumer prices were up +4.9%, slightly below expectations as well as last month’s unrevised +5.0%. The annual headline inflation reading has eased from a peak of 9.1% in June 2022 and has now declined for ten straight months. This is the first reading below +5.0% since April 2021. Core CPI, which excludes the more volatile food and energy prices, was also +0.4% for the month, in line with expectations and March. Core CPI was up +5.5% YoY, also in line with expectations and March’s level. The CPI for energy was up 0.6% in April after falling 3.5% in March. Within energy, the CPI for gasoline increased by 3%. Food prices were unchanged in April for the second month in a row. Shelter inflation appears to have peaked, declining -7 basis points to +8.1% YoY, the first month of YoY deceleration in 26 months. The bottom line for the latest read on consumer inflation is that it remains historically high, but importantly, is decelerating — even key components like shelter– and that should ease pressure on the Fed from any further hikes.
• The Producer Price Index (PPI) was up +0.2% in April, slightly under expectations for a +0.3% gain. March was revised up to -0.4% from the originally reported -0.5%. A +0.2% increase in final demand goods drove the increase in the headline index, particularly due to a +0.8% increase in the index for final demand energy. Prices for final demand services increased +0.3% month-over-month, which was the largest increase since November 2022. Year-over-year (YoY) PPI decelerated to +2.3% from +2.7% in March. That’s the lowest annual reading since January 2021. Core PPI, which strips out volatile food and energy costs, was also up +0.2% for the month, matching expectations and up from 0.0% from last month which was revised up from -0.1%. Year-over-year Core PPI also decelerated, dropping to +3.2% from +3.4% in the prior month, which was below expectations of +3.3%. Like CPI, the key takeaway from the PPI report is that wholesale inflation continues to moderate, taking pressure off the Fed in its fight against inflation.
• April Import Prices rose for the first monthly gain in 2023, up +0.4%, slightly above expectations for +0.3% and far above March’s downwardly revised -0.8% decrease (originally -0.6%). Before the April increase, eight of the previous nine months were negative. Year-over-year, import prices were down -4.8%. Imported fuel prices rose for the first time since last June, up +4.5% in April after a -3.9% drop in March. Nonfuel import prices were flat for the month, following a -0.5% the prior month. Year-over-year, nonfuel import prices are down -1.9%. US dollar weakness played a role in higher prices for overseas goods.
• The preliminary May report of the University of Michigan Consumer Sentiment Index sank to a six-month low, tumbling to 57.7 from April’s 63.5. That’s the lowest level since November 2022 and well below expectations for a modest decline to 62.9. Although it is up from its June record low, it remains at recessionary levels. The Current Economic Conditions component dropped to 64.5 from 68.2 in April. The Consumer Expectations component fell to 53.4 from 60.5. One-year inflation expectations slipped to +4.5% from +4.6%, but the five-year inflation expectations were up again, rising to +3.2% from +3.0%. That’s the highest reading since 2011.
• March Wholesale Inventories remained unchanged for the second consecutive month after being revised down from the initial estimate of +0.1 percent growth. Economist expectations were for inventories to tick up slightly. Inventories of durable goods were flat as gains in automotive and machinery were offset by declines in lumber and furniture. Nondurable goods inventories slipped -0.2%, dragged lower by petroleum, farm products, and groceries, though inventories of drugs and alcohol were higher in March. On a year-over-year basis, wholesale inventories rose by +9.1 percent in March. Wholesale inventory data isn’t adjusted for inflation.
• The weekly MBA Mortgage Application Index jumped +6.3% for the week ended May 5, following a -1.2% dip the previous week. The index has now oscillated between positive and negative readings for seven straight weeks. The Purchase Index was up +4.8% compared to a -1.2% fall the prior week and the Refinance Index soared +10.0% following a -2.0% drop the prior week. The increase came as the average 30-Year Mortgage Rate slipped -2 basis points to 6.48% and put the 30-year fixed rate up 0.95 percentage points versus a year ago.
• Weekly Initial Jobless Claims rose by +22,000 to 264,000 for the week ended May 6, worse than expectations for 247,000 and the prior week’s unrevised 242,000. That marks their highest level since October 30, 2021. The number of people already collecting unemployment claims (i.e. Continuing Claims) rose by +8,000 to 1,813,000 in the week ended April 29, up from the prior week’s downwardly revised 1,801,000 (originally 1,805,000).

The Week Ahead

It’s another light week of economic data, with a couple of regional Fed manufacturing reports from the New York and Philadelphia districts. Housing data is prominent with home price indices, existing home sales, as well as housing starts and building permits. Other notable reports include Retail Sales, Industrial Production, and the Leading Economic Index. The debt ceiling drama will still be making headlines as Treasury Secretary Janet Yellen will meet with JPMorgan Chase CEO Jamie Dimon, Citigroup CEO Jane Fraser, and other board members of the Bank Policy Institute to discuss the debt limit talks.

Did You Know?

DEFINE “BROADLY” AND “IMPROVED” – In the post-Federal Open Market Committee (FOMC) meeting press conference on 5/3/23, Federal Reserve Chairman Jerome Powell stated that conditions in the US banking sector have ‘broadly improved’ since March and that the system is ‘sound and resilient.’ But by the next morning, on 5/4, the KBW Regional Banking Index was down more than -13% for the week and down -44% from its peak in January 2022 (source: Bespoke Investment Group).

FED VS. THE MARKET – Also during the post-FOMC meeting press conference on 5/3/23, Fed Chair Powell noted in his press conference that the Federal Reserve expects inflation to come down ‘not so quickly’ and therefore rate cuts ‘would not be appropriate.’ Despite that view, as of 5/4, markets were pricing in more than four 25 basis point rate cuts between now and January 2024 and a lower federal funds rate than was priced in before Wednesday’s FOMC meeting (Source: Bloomberg, MFS).

SAFETY DANCE – Roughly half (48%) of Americans are either moderately or very worried about the safety of their bank deposits compared to 45% after the Lehman bankruptcy in September 2008. Even though the FDIC insures up to $250,000 in deposits per bank account, low-income respondents are more worried about their deposits than those with high incomes (source: Gallup, MFS).

This Week in History

HAYEK ECONOMICS – On May 8, 1899, Friedrich August von Hayek was born in Vienna. In 1974, after being ignored and ridiculed for decades, Hayek was awarded the Nobel Prize in economics for his eloquent arguments that the myriad adjustments of the marketplace can govern economies far more effectively than central planners ever could (source: The Wall Street Journal).

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment and offers a host of long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. U.S. Bonds (iShares Core U.S. Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares U.S. Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% U.S. Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.