Fed Up

Performance for Week Ending 4.28.2023:

The Dow Jones Industrial Average (Dow) finished up 0.86%, the Wilshire 5000 Total Market Index^SM (Wilshire 5000^SM) added 0.53%, the Standard & Poor’s 500 Index (S&P 500) gained 0.87%, and the Nasdaq Composite Index (NASDAQ) tacked on 1.28%. Sector breadth was mixed, with six of the S&P sector groups closing the week higher and five closing lower. The Communication Services sector (+3.76%) was the best performer, while the Utilities sector (-1.00%) was the worst.

*See below for Index Definitions

MARKET OBSERVATIONS: 4/24/23  – 4/28/23

The S&P 500 finished the week higher as the better-than-feared Q1 earnings results offset a mixed bag of economic data and another round of banking woes. For the month of April, the S&P added 1.46%-—the second consecutive monthly gain. Data reports of late have shown that the economy has been losing momentum. Last week the Commerce Department reported that the economy grew by a lower-than-forecast 1.1% pace during the first quarter. The pace was below economists’ expectations and down from 2.6% and 3.2% from the fourth and third quarters last year, respectively. One bright note of the report was the resiliency in consumer spending, the major driver of US economic growth. Personal consumption rose 3.7% in the January-through-March period, the strongest rate since the second quarter of 2021. In inflation news, the March core personal consumption and expenditures (PCE) index—the Fed’s preferred inflation barometer—rose by 4.6% on a year-over-year basis, well above the Fed’s 2.0% target. The strong consumption figures coupled with elevated levels of inflation will likely keep the Fed on track to hike rates by another 25 basis points at the conclusion of this Wednesday’s Federal Open Market Committee (FOMC) meeting. According to Bloomberg’s World Interest Rate Probability Tool, fed fund futures are projecting an 83.6% probability of such a hike.

Mixed Bag of Other Data: Away from the Q1 GDP and PCE data, the Conference Board's consumer confidence index slipped to 101.3 in April from 104.0 in March and fell short of the consensus expectations. The decline was likely attributable to some softening in the labor market as initial claims for unemployment insurance benefits have been climbing in recent weeks. Also, the stress in the banking system and tightening in lending standards likely weighed on sentiment. Meanwhile, the Census Bureau reported that new home sales rose 9.6% in March to a seasonally adjusted annual rate of 683k. Sales rose in all regions but the South. The supply of homes for sale fell 0.5% to 432k on a month-to-month basis, but were still up 5.1% year-over-year. Elsewhere, durable goods orders spiked 3.2% in March, exceeding consensus expectations for a 0.7% gain. The headline orders print was lifted by a jump in the transportation category, namely a 55.6% surge in aircraft orders. Excluding transportation, durable goods rose by a more modest 0.3% but still exceeded consensus expectations for a -0.2% decline.

Q1 Earnings: While first quarter earnings reports have been mixed, overall results are tracking at a better-than-feared pace. Through Friday, 265 members of the S&P 500 have released results, with nearly 80% exceeding expectations. Aggregate earnings for the group are off 1.7% but still solidly ahead of the 8% decline expected at the start of earnings season. The Energy and Industrials sectors have posted the strongest results so far, while Technology and Materials have posted the weakest.

The Week Ahead: All eyes will be focused on the two-day FOMC meeting that kicks off on Tuesday morning. Based on market expectations, the Fed is widely expected to increase rates by another quarter percent to a range of 5.0-5.25%. With inflation still elevated, the economy losing momentum, and the uncertainty surrounding the banking system, the bigger focus will be on their forward guidance and whether they will signal a pause in their rate hiking campaign. The market seems to be leaning toward a pause as the CME Fed Watch Tool is signaling just over a 66% probability that they will hold rates steady at the June meeting. The other highlight of the week will come on Friday when the Labor Department reports the April Payroll data. According to Bloomberg, nonfarm payrolls are forecast to rise by 182K, and the unemployment rate is expected to rise to 3.6% from 3.5% during March. The wage component of the report will also be closely watched. Bloomberg has average hourly earnings rising at a 4.2% year-over-year pace, the same rate seen during March. Other data reports of interest include the April ISM Manufacturing (Monday) and Services (Thursday) reports. On the earnings front, 155 members of the S&P 500 are scheduled to release results. Included among this group will be Dow-component Apple on Thursday. Outside of the Fed meeting, two Fed heads are scheduled to speak on Friday. St. Louis Fed President James Bullard will give an update on the economic outlook, while Fed Governor Lisa Cook will deliver the commencement address at Michigan State University.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market Index^SM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500^© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.