SCOREBOARD 6/16/2023

MARKET RECAP

US stocks had a breakout week, up by 3.43% and moving up through resistance. Despite all the bad news out there, stocks continue to push higher.

Washington managed to make a deal to save the country from default. Of course, according to Bloomberg economists Anna Wong and Maeva Cousin, it will barely make a dent in the continued disastrous trajectory of US debt, estimated to rise from 97% of GDP to 130% by 2033.

Biden signed the debt deal into law on Saturday, meaning a tidal wave of US Treasuries will come to market this week. It will be interesting to see how the market handles it.

Non-farm payrolls were up by 339,000, beating the 195,000 consensus. Bianco Research said it was the 14th consecutive monthly reading in which payrolls topped economist expectations. The prior two months were revised up by almost 100,000. The labor-force participation rate was 62.6%, the same as in May and lower than the prepandemic level of 63.3%. The average workweek fell to 34.3 hours, the lowest since April 2020.

Between the strong jobs report and the debt ceiling resolution, the Dow jumped by just over 700 points on the news, the largest one-day gain since November.

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May 2023: A Fragile Rally Under Uncertain Skies

May painted a complex picture for financial markets, offering a glimpse of potential recovery tinged with worries about the future. Here’s a breakdown of the key themes:

Global Stock Market Divergence:

• In dollar terms, global equities slipped 1.1%, highlighting a divergence in regional performance.
• The US Nasdaq Composite soared 5.93%, fueled by continued enthusiasm for artificial intelligence and strong tech earnings.
• Conversely, the Dow Jones Industrial Average dipped 3.17%, and the S&P 500 managed a meager 0.43% gain, reflecting broader economic anxieties.
• European markets fared better, with the DAX and CAC 40 registering positive returns.

Mixed Signals on Inflation:

• April’s disinflationary trend continued, with the Consumer Price Index (CPI) edging down to 4.9%.
• However, this was offset by a tenth Federal Reserve rate hike, pushing the 10-year Treasury yield up to 3.635%.
• This mixed bag of data left investors unsure about the future trajectory of inflation and Fed policy, leading to market unease.

Sector Rotation and Commodity Reversal:

• Value stocks, particularly energy and financials, outperformed growth, reflecting concerns about rising interest rates and their impact on tech-heavy sectors.
• Commodities prices tumbled, with the Bloomberg Commodity Index falling 5.64%, as recessionary fears dampened demand.
• Oil prices plunged, reflecting worries about slowing global economic growth.

Other Notable Events:

• The US debt ceiling was temporarily suspended, averting a potential fiscal crisis.
• The Bank of England and the European Central Bank began their own tightening cycles, adding to global monetary policy divergence.
• Geopolitical tensions remained high, with the war in Ukraine and increasing China-US rivalry impacting market sentiment.

Overall, May 2023 showcased a fragile rally fueled by specific sectoral trends, but overshadowed by concerns about economic uncertainty, rising interest rates, and geopolitical factors. The upcoming months will be crucial in determining whether this tentative resurgence can translate into sustained market growth or if anxieties prevail.

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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