Inflation Cools But Banking and Debt Ceiling Worries Heat Up

Performance for Week Ending 5.12.2023:

The Dow Jones Industrial Average (Dow) finished off 1.11%, the Wilshire 5000 Total Market Index^SM (Wilshire 5000^SM) fell 0.32%, the Standard & Poor’s 500 Index (S&P 500) closed off 0.29% and the Nasdaq Composite Index (NASDAQ) added 0.40%. Sector breadth was negative with 9 of the 11 S&P sector groups closing the week lower. The Communication Services sector (+4.34%) was the best performer while the Energy sector (-2.16%) was the worst.

*See below for Index Definitions

MARKET OBSERVATIONS: 5/8/23  – 5/12/23

The S&P 500 closed lower for a second straight week as worries over the banking system and looming debt ceiling dented investor sentiment. The much-anticipated Senior Loan Officer Opinion Survey (SLOOS) on Bank Lending Practices from the Federal Reserve was released last week and it showed a tightening in credit standards, a slowdown in new loan growth and the weakest credit demand since 2009. Small and mid-sized banks remained under pressure with the KBW Regional Bank index falling by over 6% last week. Since early March the index has lost nearly 34% as the failure of three regional banks sparked worries of a banking contagion. Data showing inflation easing and the economy cooling raised bets that the Fed will pause its rate hiking campaign. Despite Fed officials being adamant that a rate cut is not in the cards, the market has a different opinion. According to Bloomberg’s World Interest Rate Probability tool, fed funds futures are discounting almost three rates cuts by year-end.

Economic Roundup: On the data front, a report from the Labor Department showed consumer inflation slowed more than expected. The headline CPI print eased to 4.9% on a year-over year (y/y) basis in April from 5% but accelerated to 0.4% from 0.1% month on month. Core CPI—which filters out food and energy prices—edged down to 5.5% y/y from 5.6%. Fed Chair Powell's favored “super core services” measure rose 0.1%, the smallest increase since last July. The Labor Department also reported that the headline producer price index rose 2.3% y/y down from 2.7% in March. The core PPI edged down to 3.2% y/y from 3.4%. On the employment front, new data showed weekly unemployment claims rose by 22K to 264K, well ahead of the forecasted 245K and the highest level since October 2021. On Friday the University of Michigan Sentiment survey showed consumer sentiment soured during the month of May with the reading falling to 57.7 from 63.5 in April and the lowest reading since last November.

Debt Ceiling: Treasury Secretary Janet Yellen recently warned that the debt limit could be breached as soon as June 1. The President and Congressional leaders met last week to discuss how they could reach a compromise to lift the limit. Expectations heading into the meeting were low, and they were met, as very little progress was accomplished. History tells us that we are likely to get some sort of 11th hour resolution, however, as we saw in 2011 it may take some market pain before both sides come together. Back then the debt ceiling standoff resulted in the credit rating on the US being downgraded by Standard and Poor’s – sending shivers through the equity markets. From late-July through early-August the S&P 500 retreated by over 16% and then basically traded sideways over the next couple of months.

Q1 Earnings: As we enter the final stretch of the first quarter earnings season, results continue to track at a better than feared pace. Through Friday, 457 members of the S&P 500 have released results with just over 77% exceeding expectations. Aggregate earnings for this group are down 3.9%, slightly weaker than what analysts are now forecasting for collective first quarter profits, but still 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.

The Week Ahead: On the data front, all eyes will be on the retail sales data due out on Tuesday morning. After declining by -0.3% in March, economists are expecting a rebound to +0.4% in April. Other reports of interest on the economic calendar include the May Empire Manufacturing index, April Industrial Production, April Housing Starts and Building Permits, Existing Home Sales for April and the Leading Economic Indicators report for April. Apart from the economic statistics, investors will get a read on the US consumer from retailers which report earnings, including Home Depot (Tuesday), Target (Wednesday), Walmart (Thursday). With inflation still elevated and economic growth slowing, their insights into the composition of consumer spending and outlooks will be watched very closely. The Fed speaking calendar will be very busy with 14 presentations scheduled, including Fed Chair Powell on Friday morning.

— 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.