Q1 Earnings Season and Inflation Data Will Take Center Stage

Performance for Week Ending 4.7.2023:

The Dow Jones Industrial Average (Dow) finished up 0.63%, the Wilshire 5000 Total Market Index^SM (Wilshire 5000^SM) fell 0.50%, the Standard & Poor’s 500 Index (S&P 500) dipped 0.06% and the Nasdaq Composite Index (NASDAQ) shed 1.08%. Sector breadth was mixed with 6 of the S&P sector groups closing the week lower and 5 closing higher. The Utilities sector (+3.11%) was the best performer while the Industrial sector (-3.37%) was the biggest laggard.

*See below for Index Definitions

MARKET OBSERVATIONS: 4/3/23  – 4/7/23

After three straight weekly gains, the S&P 500 finished the holiday shortened week modestly lower. With the Fed’s rate hiking campaign expected to conclude after next month’s FOMC meeting, investors have turned their attention to economic data which has shown signs that the economy is starting to lose momentum. A report from payroll processor ADP showed nonfarm private sector employment rising by a weaker than expected 145K in March, down from a 261K gain in February. The report followed Labor Department data showing job openings fell to the lowest level since 2021 in February, a sign that demand for workers is beginning to slow. Meanwhile, the Institute for Supply Management's service sector activity index, a bellwether of business conditions at U.S. companies, fell to a three-month low of 51.2% in March, a signal the economy is losing momentum. Elsewhere, the ISM Manufacturing Index fell to 46.3 in March, below consensus expectations and its lowest level since May 2020. The forward-looking new orders component held in contraction territory for a seventh straight month. Employment stayed below the 50-threshold, pointing to less jobs in the sector, and respondents expressed more concern on the outlook.

The Energy sector (+3.03%) was a star performer last week after oil prices surged in reaction to Saudi Arabia and other OPEC+ oil producers announcing that they would cut production by more than a million barrels a day starting in May. The prospect of higher oil costs added to inflation worries just days after evidence of cooling prices raised expectations that the U.S. Federal Reserve might soon end its aggressive monetary tightening campaign. Cleveland Fed President Loretta Mester said not so fast. Mester, speaking on Bloomberg TV, said Fed officials will need to raise interest rates “a little bit higher” and then hold them there for some time to bring inflation back toward their 2% goal. The banking sector remained volatile last week after JP Morgan CEO Jamie Dimon said in his annual letter to shareholders that the banking crisis is "not yet over" and will be felt for years.

Payrolls: On Friday, the Labor Department reported the highly anticipate monthly jobs report. Overall, the report was mixed and is likely to keep the Fed on track to hike by 25 basis points at the conclusion of the May 3 FOMC meeting. The report showed nonfarm payrolls rising by 236K during the month of March, slightly ahead of the 230K expected by economists, but the lowest level of additions since December 2020. The unemployment rate dipped to 3.5% from 3.6% during the prior month. On a year-over-year basis average hourly earnings grew by 4.2%, down from 4.6% in February, and slightly below the 4.3% pace expected by economists. While the pullback in wage growth will be viewed favorably by the Fed, the current pace of growth still remains too high for Fed officials to take comfort.

The Week Ahead: The focal point in the week ahead will the March consumer price index (CPI) report on Wednesday. The report follows a downside surprise in the February personal consumption and expenditures (PCE) inflation data, which is the Fed’s preferred inflation barometer. According to Bloomberg, the headline CPI is expected to come in at 5.1% on a year-over-year basis down from 6.0% y/y in February. The core rate—which excludes food and energy—is expected to rise to 5.6% y/y from 5.5% y/y in February. Apart from the CPI, investors will have several other indicators to assess inflationary pressures, including the producer price index (PPI) data on Thursday and the University of Michigan's inflation expectations survey on Friday. Other data reports of interest include weekly jobless claims and March retail sales on Friday. First quarter earnings season will kick off in earnest this week with a handful of banking giants scheduled to release results on Friday. Following the recent turmoil in the banking sector, these results and comments from company management will be watched very closely. Five Fed heads are scheduled to speak during the week and the Fed will also release the meeting minutes from its March gathering on Wednesday.

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.