Debt Ceiling Talks in Focus as X-date Looms

Performance for Week Ending 5.19.2023:

The Dow Jones Industrial Average (Dow) finished up 0.38%, the Wilshire 5000 Total Market Index^SM (Wilshire 5000^SM) added 1.69%, the Standard & Poor’s 500 Index (S&P 500) finished up 1.65% and the Nasdaq Composite Index (NASDAQ) tacked on 3.04%. Sector breadth was positive with 7 of the 11 S&P sector groups closing the week higher. The Technology sector (+4.19%) was the best performer while the Utilities sector (-4.36%) was the worst.

*See below for Index Definitions

MARKET OBSERVATIONS: 5/15/23  – 5/19/23

The S&P 500 finished the week higher, breaking a two-week losing streak. Driving the gains was signs of progress toward solving the debt ceiling stalemate. However, on Friday talks appeared to have broken down after Republican negotiators left a closed-door meeting with White House representatives soon after it began. According to media reports Republican Representative Garret Graves stated, "they're just unreasonable," and added that the talks were on a "pause." Mere hours before the talks broke down Biden officials said debt negotiators were making headway. Upbeat quarterly results from Dow-component Walmart added to the positive tone. Walmart posted stronger-than-expected first quarter earnings and lifted its full-year profit forecast. Walmart results are watched very closely as the company is viewed as an important bellwether for consumer spending, the main driver of US economic growth.

Debt Ceiling Talks Were Going Well, Until They Weren’t: Early in the week markets rallied on news that President Biden and House Speaker Kevin McCarthy were making progress in the debt ceiling talks. Before leaving on a trip to the G-7 leaders' summit in Japan, President Biden told reporters that he was “confident that we’ll get the agreement on the budget and that America will not default.” House Speaker McCarthy acknowledged that “it is possible to get a deal by the end of the week” despite there being a lot of work to do. He also noted that the talks were “more productive” than previous meetings and that a smaller group of staffers from both sides are working toward a deal. Senate leadership from both parties exhibited optimism that a deal could be reached as well.

Economic Roundup: On the data front, applications for US unemployment benefits fell by the most since 2021 after fraudulent claims in Massachusetts boosted the numbers in previous weeks. Initial unemployment claims fell by 22K to 242K in the week ended May 13. The four-week moving average of initial claims, which helps smooths the week-to-week volatility, fell to 244K, but remains well above the September low of 191K. Elsewhere, the National Association of Realtors reported that sales of previously owned US homes fell in April, restrained by limited inventory and high mortgage rates, while the median selling price dropped by the most in 11 years. Contract closings decreased 3.4% to a 4.28 million annualized pace, the slowest in three months. The median selling price fell 1.7% from a year earlier, to $388,800. Meanwhile, the Commerce Department reported that retail sales rose 0.4% in April, recouping some of the losses suffered in March and February, but fell short of the +0.8% gain expected by economists. A separate report showed production at US factories rebounded in April, led by the biggest increase in motor vehicle output since late 2021.

Fed Speak: On Friday, Fed Chair Powell sat down with his predecessor, Ben Bernanke, for a question-and-answer session at the Thomas Laubach Research Conference in Washington later this morning. The event marked Powell's first public appearance since the Fed's last policy meeting on May 3, when the central bank lifted its benchmark Fed Funds rate for the tenth consecutive time, taking it to a 2007 high of between 5% and 5.25%. At the conference, Powell signaled that he is inclined to pausing interest-rate increases next month, saying that “as policy has become more restrictive, the risks of doing too much versus doing too little are becoming more balanced.” The Fed Chair added that “having come this far, we can afford to look at the data and the evolving outlook to make careful assessments.” Dallas Fed President Lorie Logan came across as a bit more hawkish saying the case for pausing interest rate increases at the central bank’s June meeting isn’t yet clear. “After raising the target range for the federal funds rate at each of the last 10 FOMC meetings, we have made some progress,” Logan said at a Texas Bankers Association conference in San Antonio. “The data in coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren’t there yet.” Logan added that she’s keeping an open mind ahead of next month’s meeting but expressed disappointment in the lack of progress in inflation. Federal Governor Philip Jefferson suggested he is willing to be patient to see how an aggressive rise in interest rates over the past year filters through the economy, citing the delayed effects of policy and uncertainty around tighter lending standards. “History shows that monetary policy works with long and variable lags, and that a year is not a long enough period for demand to feel the full effect of higher interest rates,” Jefferson said.

Q1 Earnings Wrapping Up: With just a handful of S&P 500 companies left to report, the final tally of results looks like the quarter will wrap up at a better than feared pace. Through Friday, 471 members of the S&P 500 have released results with just over 77% exceeding expectations. Aggregate earnings for this group are down 2.8%, modestly better than the 3.3% decline that analysts are now forecasting for collective first quarter profits, and well ahead of the 8% decline expected at the start of earnings season. On the sector level Consumer Discretionary, Industrials and Energy have posted the strongest results, while Materials, Utilities and Health Care have delivered the weakest. Looking at full year consensus expectations from Bloomberg, 2023 are currently forecast to fall 2.5% to $218.40. For 2024 analysts expect earnings to grow by 10.9% to $241.70.

The Week Ahead: Could be a pivotal week as we move closer X-date deadline for the debt ceiling, which Treasury Secretary Yellen has indicated could be as soon as June 1st. Investors will be awaiting any news flow following House Speaker McCarthy's comments that a House vote could happen during the week, particularly considering the breakdown in talks on Friday. Inflation will move to the front burner with the April core Personal Consumption and Expenditures (PCE) report—the Fed’s preferred inflation metric—due out on Friday. According to Bloomberg, economists expect month over month growth to continue at a +0.3% pace and 4.6% year-over-year, matching the March data. Other reports of interest on the economic calendar include April New Home Sales, the Richmond Fed Manufacturing Index for May, Initial Jobless Claims, April Personal Income and Spending, and Durable Goods Orders during the month of April. The Fed speaking calendar shows 5 speaking engagements scattered throughout the week. On Wednesday the Fed is scheduled to release the meeting minutes from its May FOMC meeting.

— 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.