MARKET RECAP

• US stocks +1.70%, international +0.65%, bonds -1.32%.
• The market continues up despite all the bad news and the consensus that it should go down.
• Tech stocks are flying especially if they are connected to AI.
• The Leading Economic Indicators (LEI) have now fallen for 13 straight months.
• The debt ceiling is still not fixed with time running out.
• BofA’s global fund survey shows managers expect a soft landing.

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MARKET RECAP

• US stocks fell by 0.23%, barely budging despite no debt limit deal with about two weeks remaining.
• The S&P 500 moved less than 1% in either direction in the sixth week in a row.
• One-month t-bills were yielding 5.79% due to the risk of default.
• Biden has an approval rating of 37%, the lowest since Truman’s second term. This, despite a 3.4% unemployment rate.
• Jonathan Golub, chief US equity strategist at Credit Suisse, says the S&P 500 has returned 16.9% on average in the 12 months following the last interest rate hike of a cycle.
• But there are still lots of negatives – the probability of default; inflation is still high, more potential problems in the banking system, high p/e ratio in the market, and negative earnings growth.
• CPI declined for the 10th straight month (4.9% YoY), and PPI is increasing at its slowest rate since 2021.
• Discretionary investors are underweight stocks, in the 9th percentile historically, providing possible fuel if the market starts moving higher.

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MARKET RECAP

US stocks fell by 0.78%, while international stocks managed an advance of 0.48%.

The US added 253,000 jobs in April, indicating that the labor market continues to be solid, despite rising rates and the banking crisis. It was the best gain since January. The unemployment rate fell to 3.4%. Wages were up by 4.4% year over year.

During the week, the Fed raised its benchmark interest rate by one-quarter point to between 5% and 5.25%. Powell indicated the Fed might pause hikes until they have a better understanding of the impact of all of the recent increases. But the strong labor report might change that calculation.

Banking continues to be an area of concern. The SPDR Regional Banking ETF, KRE, fell by 10% on the week.

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April 2023: Financial Markets Navigate a Sea of Calm (with Undercurrents)

April brought a sense of relative calm to financial markets, a welcome change after the volatility of previous months. However, beneath the surface lurked currents of uncertainty that could impact the future trajectory. Here’s a snapshot of the key themes:

Market Consolidation:

• Major indices saw modest gains, with the S&P 500 up 1.6%, the Dow Jones rising 2.6%, and the Nasdaq barely inching forward at 0.1%.
• The subdued trading reflected a balance between positive earnings surprises from large tech companies and lingering concerns about global inflation and ongoing geopolitical tensions.

Bond Market Stability:

• Interest rates stabilized, with the 10-year U.S. Treasury note holding steady at around 3.45%.
• This reflected the market’s perception of a measured pace of Federal Reserve rate hikes, despite continued hawkish rhetoric.

Mixed Sector Performance:

• Value stocks outperformed growth, with energy and financials leading the charge.
• Technology lagged behind, despite solid earnings from individual companies.

Global Market Divergence:

• Developed markets performed slightly better than emerging markets, with the MSCI EAFE rising 2.8% compared to the MSCI EM’s 1.1% decline.
• China’s economic slowdown and regional geopolitical anxieties weighed on emerging markets.

Other Notable Events:

• The International Monetary Fund (IMF) downgraded its global growth forecast, citing increased economic risks.
• The Bank of Japan maintained its ultra-loose monetary policy under new Governor Kazuo Ueda, highlighting the divergence in global monetary policy strategies.

Overall, April 2023 was a month of market consolidation marked by cautious optimism. However, the underlying currents of economic uncertainty and potential policy divergences could shape the next phase of the market’s performance. The ability of central banks to navigate the tightrope of inflation control and economic growth will be crucial in determining the future direction of financial markets.

HIGHLIGHTS

• S&P 500 +0.87%
• Despite a rally this year, less than 1/3 of the stocks in the S&P 500 have outperformed the index.
• Apple and Microsoft make up 14% of the S&P 500.
• The S&P trades at 18x next year’s earnings versus a 16.9x five-year average (for the period ending 2019), and interest rates are much higher now.
• The average recession drops EPS by 31%.
• The debt ceiling crisis is still out there and will have to be dealt with soon.

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MARKET RECAP

• S&P 500 -0.1% for the week
• Most of the advance this year is due to the largest 20 stocks in the S&P 500.
• The equity risk premium, currently 1.59%, is the lowest since October of 2007.
• CAPE is at 29, in the 90th percentile.
• OPEC announced a surprise cut in oil production; energy moved up in price.
• US bank lending fell in the last two weeks of March by the most on record.

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MARKET RECAP

A big week for stocks as US markets rallied by 3.64% and international stocks by 3.37%. Bonds were off by 0.52%.

A winning quarter wrapped up on Friday, with US markets up by 7.2% and the Nasdaq up by 17%. Bonds also rallied for the quarter, up by 3.23%, as the 10-year yield fell from 3.826% to 3.491%. The much-feared recession has yet to arrive, and the labor market is still strong. The Fed has continued to raise rates, but that did not stop a winning quarter.  Estimated earnings for the quarter just ended are expected to drop by 4.6%, following a 3.2% decline in Q4. But investors seem to be looking past all of that.

For all the predictions by the “experts” that the market will turn down with all of the bad news, stocks have taken a near-term turn upwards and are back up the declining trend line.

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March 2023: Rebounding Spirits Amidst Banking Jitters

Following February’s pullback, March saw a rebound in sentiment for financial markets, albeit amidst new concerns. Here’s a breakdown of the key highlights:

Equity Market Bounce:

• Major indices recovered, defying some negative forecasts.
• The S&P 500 climbed 4.5%, the Dow Jones 3.4%, and the Nasdaq a staggering 17.05%.
• Growth stocks continued their outperformance, leading the charge in the recovery.

Fading Concerns Over Inflation:

• The CPI fell for the first time since October 2021, fueling hopes for peak inflation.
• This dovish sentiment led to a decline in long-term bond yields.

Central Bank Tightrope Walk:

• The Federal Reserve maintained its 0.25% rate hike pace, while acknowledging the potential for slower economic growth.
• Global central banks like the Bank of England and the European Central Bank also began a gradual process of policy tightening.

Banking Sector Stress:

• The collapse of Silicon Valley Bank, a key financial institution, rattled the banking sector and created short-term volatility.
• However, government interventions and broader market resilience minimized the damage.

International Markets Uptick:

• Developed markets like the MSCI EAFE recovered 4.2%, while emerging markets, particularly China, also bounced back with a 2.3% gain.

Other Notable Events:

• China set a lower GDP growth target of “around 5%” for 2023, indicating concerns about its economic slowdown.
• The ongoing war in Ukraine continued to contribute to supply chain disruptions and energy price volatility.

Overall, March was a month of renewed optimism for financial markets. The fading threat of inflation and cautious central bank actions allowed for a rally, despite the temporary shock of the banking crisis. However, uncertainty remains regarding the sustainability of the uptrend, with factors like geopolitics and potential economic headwinds playing a role.

MARKET RECAP

US stocks managed a gain for the week as the S&P 500 finished up by 1.48%. Bonds also were up as yields fell slightly. The 2-year yield fell five basis points to 3.76%. The peak on the curve is about 4-5 months out at 4.8%.

The scare in banking is hurting financing. No investment-grade credit has been issued since the collapse of Silicon Valley Bank. In the high-yield market, the percentage of distressed issues yielding 10% or more compared to equivalent Treasuries’ increased to 10.6% from 7.8% seven trading days prior. Some economists estimate the hit to the economy would be the equivalent of raising rates by 1/2 point to 1.5 points. Even with that, the Fed went ahead this week and raised rates by 1/4 point.

An aggregate M-Score for almost 2,000 companies shows the probability of fraud in the group is at the highest level in 40 years. The M-Score, developed by Messod Beneish from Indiana University, worked with several co-authors to measure the aggregate score. The M-Score received prominence for spotting problems with Enron three years before its collapse. It measures if companies are getting too aggressive with their accounting and/or committing fraud. The metric often rises rapidly before a recession.

All in all, the probability is increasing that a recession is coming.

One big winner is gold; GLD is up by 9.5% year-to-date.

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