Stocks Take a Breather Following Recent Gains

Performance for Week Ending 6.23.2023:

The Dow Jones Industrial Average (Dow) finished off 1.67%, the Standard & Poor’s 500 Index (S&P 500) dipped 1.39% and the Nasdaq Composite Index (NASDAQ) shed 1.44%. Sector breadth was negative with 10 of the 11 S&P sector groups closing the week lower. The Real Estate sector (-4.03%) led on the downside followed by the Energy (-3.45%) and Utilities (-2.59%) sectors. The Healthcare (+0.24%) sector bucked the trend to close mildly higher.

*See below for Index Definitions

MARKET OBSERVATIONS: 6/19/23  – 6/23/23

The S&P 500 finished the week lower, breaking a five-week winning streak, on worries that persistent inflation will pressure the Fed to follow through on its pledge of two more interest rate hikes. Testifying on Capitol Hill last week, Fed Chair Powell warned that more interest-rate increases are likely this year to combat inflation, doubling down on the hawkish view that the central bank isn't done with its aggressive monetary tightening campaign. During testimony to the House Financial Services Committee, Powell said it "makes sense" for interest rates to be moved higher, though at a "more moderate pace," reiterating a message from the recent monetary policy meeting when the fed funds rate was left unchanged at 5% to 5.25%. "Nearly all [FOMC] participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year," Powell said in a prepared statement to the committee. "But at last week's meeting, considering how far and how fast we have moved, we judged it prudent to hold the target range steady to allow the Committee to assess additional information and its implications for monetary policy."

In other Fed news, Atlanta Fed President Raphael Bostic said he supports holding the central bank’s target-rate level and that it’s prudent to give time for inflation to ease in response to past moves. “Letting restrictive policy work for a while is prudent because the policy has been truly restrictive for less than a year, and it takes time for monetary policy changes to meaningfully influence economic activity,” Bostic said in an online commentary, adding “the bar to justify further rate hikes is higher than it was a few months ago.” Meanwhile, Fed Governor Michelle Bowman reinforced Powell’s hawkish remarks, saying “additional policy-rate increases will be necessary” to curb inflation that is still unacceptably high. That sentiment was echoed by Richmond Fed President Thomas Barkin, who said he’d be “more than comfortable doing more” on rates if price pressures don’t ease as expected.

Data Roundup: Last week’s batch of economic data seemed to aggravated fears about a potential recession, which also helped dampen the appetite for risk assets. Initial jobless claims held steady at 264K during the week ended June 17, well above the 259K expected by forecasters. The four-week moving average of claims—which helps smooth the week-to-week volatility—rose 8.5K to 255.8K, a third straight increase and the highest level since November 2021. The Conference Board's measure of leading indicators fell 0.7% in May but was slightly better than expectations for a 0.8% retreat. The measure has now fallen for fourteen consecutive months and sits at the lowest level since July 2020. As part of the release, the Conference Board said they expect the US economy to contract from the third quarter of this year to the first of next because of continued policy tightening and lower government spending. According to the National Association of Realtors, sales of previously owned US homes barely rose in May as high mortgage rates continued to crimp demand and discourage owners from listing their properties. Contract closings edged up 0.2% to a 4.3 million annualized pace. Compared with a year earlier, sales were down more than 18% on an unadjusted basis. The number of homes for sale fell 6.1% from a year earlier to 1.08 million units. At the current sales pace, it would take three months to sell all the properties on the market — below six months of supply that is considered a balanced market.

The Week Ahead: The focal point of this week’s data calendar will be the personal spending and income data, including the PCE release (the Fed’s preferred inflation barometer) on Friday. Other notable US data releases include May durable goods orders, new homes sales during May, June consumer confidence from the Conference Board, and the weekly jobless claims release on Thursday. The Fed speaking calendar will be on the light side with just four speeches scheduled, although two of those will be delivered by Fed Chair Powell on Thursday and Friday. On Wednesday, the Federal Reserve is also scheduled to release the results of its annual bank stress tests. This report will be closely watched following the regional banking turmoil this Spring that resulted in several bank failures. While the kick-off to second quarter earnings season is still a few weeks away, there are several notable reporters due to release results this week. These include consumer driven firms like Carnival on Monday and Nike on Thursday. Semiconductor maker Micron will release its latest report on Wednesday, same day as General Mills.

— 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.