Debt Ceiling Lifted

Performance for Week Ending 6.2.2023:

The Dow Jones Industrial Average (Dow) finished up 2.02%, the Standard & Poor’s 500 Index (S&P 500) gained 1.83% and the Nasdaq Composite Index (NASDAQ) tacked on 2.04%. Sector breadth was positive with all 11 of the S&P sector groups closing the higher. The Consumer Discretionary sector (+3.27%) led the way followed by Real Estate (+3.07%) and Materials (+2.87%).

*See below for Index Definitions

MARKET OBSERVATIONS: 5/29/23  – 6/2/23

The S&P 500 finished higher for the third consecutive week following a deal to extend the debt ceiling by two years and strong signaling from the Federal Reserve (Fed) that it is considering skipping a rate hike at this month’s FOMC meeting. The Nasdaq Composite gained for a sixth straight week while the Dow has closed higher in two of the past three weeks. During a speech on financial stability and the economy, Fed Governor Philip Jefferson (who has been nominated to become Vice Chair) signaled the central bank is inclined to keep interest rates steady at its next meeting to give policymakers more time to assess the economic outlook, but such a decision wouldn’t mean hikes are finished. “A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle,” Jefferson said. “Indeed, skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming.” The uncertainty surrounding the debt ceiling was put to bed late last week after both the House and Senate voted to pass the bill and send it to President Biden who signed it into law on Saturday. While the debt limit is often used as a political football, the extension shouldn’t come as a real surprise. Prior to last week’s deal, since 1960 the debt ceiling has been hit 78 times and in every single case it has been raised.

Payroll Report: While the 339K jump in nonfarm payrolls captured all the headlines, under the surface the overall report sent mixed signals. The unemployment rate, which is calculated using a different survey, rose to 3.7% from 3.4% marking the biggest increase since April 2020. Wages moderated a bit with average hourly earnings (AHE) rising 0.3% during the month and 4.3% from a year ago. Over the last three months average hourly earnings grew at a 4.0% annualized rate, suggesting some slowing of wage inflation pressures relative to a year ago. While the headline nonfarm payrolls numbers in isolation would dictate that the Fed hike rates at the upcoming FOMC meeting, the moderation in wages and uptick in unemployment should provide the Fed some cover to hold rates steady. According to the CME FedWatch tool the probability of a pause at the June meeting stands at 67%. However, the odds of a 25-basis point hike in July have been steadily raising and now stand at 68%, up from zero at the start of May.

Other Fed Speakers: Echoing Fed Governor Jefferson, Philly Fed President Patrick Harker said the Federal Reserve should take a break from raising interest rates, after moving them up at each of the last ten meetings. "I am in the camp increasingly coming into this meeting thinking that we really should skip, not pause," Harker said, during a discussion hosted by the Official Monetary and Financials Institution Forum in Philadelphia. Richmond Fed President Tom Barkin said he is looking for signs that demand is cooling to be convinced that US inflation will ease. “I believe you need to bring inflation down by bringing demand down,” Barkin said during a virtual event hosted by the National Association for Business Economics. “I’m looking to be convinced that demand is in fact coming down, and that then will start to bring inflation down.” Barkin indicated he was undecided on whether to support another increase in interest rates at the Fed's next policy meeting on June 13-14. "There is a lot of uncertainty of where rates need to go," Barkin said, though he called the current level "restrictive." That's Fed jargon for a level of interest rates sufficient to slow the economy. Last week the Fed also released its Beige Book report. The report, put together by the Chicago Fed, draws from anecdotal information collected by the institution’s 12 regional banks through May 22, said the US economy showed signs of cooling in recent weeks as hiring and inflation eased slightly.

Economic Roundup: On the data front, the Conference Board’s index of consumer confidence fell to a six-month low as views about the current state of the labor market and the outlook for business conditions slipped. Consumer confidence declined to 102.3 in May from an upwardly revised 103.7 in the prior month. The share of consumers who said jobs were “plentiful” fell to the lowest level in more than two years. The confidence gauge remains well below pre-pandemic levels and highlights the growing uncertainty about the economy. The Fed’s closely watch JOLTS report showed job openings rose for the first time in 2023, increasing 358k in April to 10.1 million. The increase erases some of the 1.5 million decline that occurred over the course of Q1, and signals that demand for workers remains robust despite the Fed's aggressive rate increase campaign. Initial jobless claims rose 2k to 232k in the week ended May 27, roughly in line with the consensus estimate of 235k. Initial claims for the prior week were revised up by 1k to 230k. The four-week moving average for initial claims fell 3k to 230k. After climbing through most of Q1, initial claims seem to have topped out and have drifted lower in recent weeks, a reminder that labor market conditions are still tight. Elsewhere on the labor front, the ADP Research Institute reported that companies added 278K jobs during May, well ahead of the consensus estimate of 170K. The increase in May hiring was led by leisure and hospitality, while mining, construction and trade and transportation also added to headcount. The gains were concentrated in companies with fewer than 500 employees. Meanwhile, the ISM Manufacturing PMI declined 46.9 in May and stayed in contraction territory for the seventh straight month. The details of the report pointed to a better balance between demand and supply in May. Despite heightened uncertainty and persistent recession fears, respondents noted they're preparing for a turnaround in the second half of the year.

The Week Ahead: As is typical the week after the release of the monthly payroll report, the data calendar is very light. The focal points this week will be the April Factory Orders, the May ISM Services Index, and weekly Jobless Claims. The Fed speaking calendar will be nonexistent as Fed members enter into the blackout period ahead of next week’s FOMC meeting. The earnings calendar will also be light with just three members of the S&P 500 scheduled to release quarterly results.

— By Michael Schwager, Chief Market Strategist, Managing Director

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.