Inflation Data to take Center Stage

Performance for Week Ending 5.5.2023:

The Dow Jones Industrial Average (Dow) finished off 1.24%, the Wilshire 5000 Total Market Index^SM (Wilshire 5000^SM) fell 0.72%, the Standard & Poor’s 500 Index (S&P 500) closed off 0.80% and the Nasdaq Composite Index (NASDAQ) added 0.07%. Sector breadth was mixed with 8 of the S&P sector groups closing the week lower and 3 closing higher. The Technology sector (+0.60%) was the best performer while the Energy sector (-5.81%) was the worst.

*See below for Index Definitions

MARKET OBSERVATIONS: 5/1/23  – 5/5/23

The S&P 500 finished the week lower following another 25-basis point rate hike by the Federal Reserve (Fed), as well as, debt ceiling jitters and worries over the health of the US banking system. On Friday, markets pared some of the losses from earlier in the week following an upbeat quarterly earnings report from tech-bellwether Apple and the monthly payroll data showing the economy added a better-than-expected 253K nonfarm payroll jobs during April.

FOMC Meeting: As expected the Fed raised the fed funds target rate by 25 basis points to a range of 5.00%-5.25%, leaving it in line with the year-end peak implied by the Fed’s March projections. The after-meeting statement omitted a line from the March statement that said the committee “anticipates that some additional policy firming may be appropriate.’’ Instead, the updated statement said, “the committee will closely monitor incoming information and assess the implications for monetary policy.” The FOMC will now take into account various factors “in determining the extent to which additional policy firming may be appropriate.” The new guidance appears to leave the door open to further tightening but provides the Fed with optionality if conditions warrant.

During the after-meeting press conference, Fed Chair Powell said the decision on a rate hike pause "was not made today." Later in the presser, Powell stated, "we're much closer to the end than the beginning," and slipped in "maybe even there." Powell said bank conditions had “broadly improved” since early March but said the strains in the sector “appear to be resulting in even tighter credit conditions for households and businesses.” Powell noted that “the extent of these effects remains uncertain,” adding that it’s possible the US could experience what he hopes would be a mild recession, but “the case of avoiding a recession is in my view more likely than that of having a recession.”

Banks Tank: The banking sector has been under extreme pressure since Silicon Valley Bank failed in mid-March and sparked contagion worries. The 2008 financial crisis is still fresh on people’s minds and investors have been quick to exit the shares despite reassurance from bankers and regulators that the worst of the crisis appears to be behind. Early last week, the government seized and subsequently sold First Republic Bank to JPMorgan. It was the second-largest bank failure in U.S. history and the third failure of a midsize bank in two months. According to media reports, U.S. federal and state officials are looking into whether "market manipulation" has prompted the recent sell-off in banking shares. The extreme volatility has consumers worried about the safety of their money in banks. A recent Gallup poll showed that 48% of respondents were either very worried or moderately worried about the safety of money deposited in banks and other financial institutions. That’s above the level during the 2008 Great Financial Crisis when a similar poll showed 45% of respondents said they were very or moderately worried.

Economic Roundup: The ISM Manufacturing Index climbed to 47.1 in April from 46.3, slightly above consensus expectations but nonetheless indicating an ongoing contraction in the manufacturing sector for the sixth consecutive month. The pricing component within the index climbed 4 points to 53.2, the highest reading since summer 2022, indicating that the pace of goods disinflation for consumers may moderate in the period ahead. Meanwhile, data from the ADP Research Institute showed private payrolls rose by 296K during April, more than double the pace during March and well ahead of consensus expectations for a 150K gain. While the pace of job growth accelerated last month, wages cooled. For those who changed jobs, the median increase in annual pay was 13.2%, down from 14.2% in the prior month and the slowest pace since November 2021. Elsewhere, the Institute for Supply Management’s overall gauge of services edged up to 51.9 last month from 51.2 in March (note: readings above 50 indicate expansion).

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, 424 members of the S&P 500 have released results with just over 78% exceeding expectations. Aggregate earnings for the group are off 2.7% but still solidly ahead of the 8% decline expected at the start of earnings season. According to Bloomberg data, updated expectations are for the quarter to finish out with a 3.4% decline. The Consumer Discretionary, Energy and Industrials sectors have posted the strongest results, while Materials, Health Care, and Utilities have delivered the weakest.

The Week Ahead: Inflation data will be the focal point of this week’s data calendar with the Consumer Price Index due out on Wednesday and the Producer Price Index follows on Thursday. The University of Michigan will also release its May survey data on consumer inflation expectations over the next year. First quarter earnings season will continue to wind down with just 33 members of the S&P 500 scheduled to release results. Just four members of the Federal Reserve are scheduled to speak next week. Another notable data release this week, which was highlighted during the Fed press conference, is the Senior Loan Officer Opinion Survey (SLOOS) on Monday. The report will be key in assessing how credit conditions have evolved amid the recent turmoil in the banking sector and what the potential implications for the economic outlook. Markets will also pay close attention to the outcome of a debt ceiling-focused meeting between President Biden and congressional leaders on Tuesday following last week's warning from Treasury Secretary Yellen that the limit could be reached as early as June 1.

— 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.