Strong Data Weighs on the Market

Performance for Week Ending 7.7.2023:

The Dow Jones Industrial Average (Dow) finished off 1.96%, the Standard & Poor’s 500 Index (S&P 500) dipped 1.16% and the Nasdaq Composite Index (NASDAQ) shed 0.92%. Sector breadth was negative with 10 of the 11 S&P sector groups closing the week lower. The Healthcare (-2.87%) led on the downside followed by the Materials (-2.01%) and Technology (-1.46%) sectors. The Real Estate (+0.21%) sector bucked the trend to close mildly higher.

*See below for Index Definitions

MARKET OBSERVATIONS: 7/3/23  – 7/7/23

The S&P 500 finished the week lower and has now posted losses in two of the past three weeks. It was a good news is bad news type of week with strong economic data weighing on the markets. While the data lessens the likelihood of a near-term recession, it also raises the odds that the Fed will need to be more aggressive in tightening monetary policy. In fact, Fed officials continue to signal that more rate hikes are needed to cool things down. Dallas Fed President Lorie Logan said last week that more interest-rate increases will likely be needed to spur meaningful disinflation and bring price-growth rates back to the central bank’s target. Speaking at the Central Bank Research Association’s annual meeting in New York, Logan said “I remain very concerned about whether inflation will return to target in a sustainable and timely way,” adding “more-restrictive monetary policy will be needed to achieve the FOMC’s goals of stable prices and maximum employment.” According to Bloomberg’s World Interest Rate Probability tool, the odds of a rate hike at the upcoming July FOMC meeting jumped to 89% and the market is discounting a 42% chance of an additional rate hike in November.

FOMC Meeting Minutes: The minutes from the June FOMC meeting showed a united front with the Fed agreeing to hold interest rates steady to buy time and assess whether further rate hikes would be needed. According to the minutes “almost all” officials judged that it would be “appropriate or acceptable” to leave rates unchanged at 5.00% to 5.25%, ‘almost all” also “judged that additional increases in the target federal funds rate during 2023 would be appropriate.” Some officials favored another 25bp hike, but “most” believed that a pause “would allow them more time to assess the economy's progress.” In general, officials judged that, while GDP growth was muted and “supply and demand in the labor market were coming into better balance,” labor market conditions were nevertheless still tight. On the upside, “banking stresses had receded and conditions in the banking sector were much improved” and “the effect of high interest rates on the housing sector appeared to be bottoming out.” The big problem was the lack of progress toward meeting the Fed’s price stability goal, with participants admitting that “core inflation had not shown a sustained easing since the beginning of the year.”

Data Roundup: The ADP Research Institute showed private employers added an estimated 497K jobs in June following a revised 267K gain in May. The results were more than double the consensus forecast of 225K. Meanwhile, a report from the Labor Department showed continuing jobless claims — a proxy for the number of Americans receiving jobless benefits — fell to 1.7 million in the week ended June 24, a four-month low. Elsewhere, the ISM services PMI rose to 53.9 in June from 50.3 in May, the highest level since February and ahead of consensus expectations. The details of the report were solid, and the base of growth widened as 15 service industries reported expansion (up from 11 in May). The closely watched monthly payroll report capped the week off showing the economy added 209K non-farm jobs during June. While the number of jobs added fell short of economist’s expectations and job gains over the prior two months were revised lower, the overall report was solid. The unemployment rate fell to 3.6% from 3.7% in May. Average hourly earnings rose 4.4% from a year earlier, and the average work week edged up.

The Week Ahead: The focal point of this week’s data calendar will be the release of the Consumer Price Index (CPI) for June on Wednesday. According to Bloomberg, economists expect a +0.3% month-over-month gain for headline inflation and +0.3% for core (ex food and energy). On a year-over-year basis headline inflation is expected to rise +3.1%, with the core rate up +5.0%. Another piece of the inflation puzzle will come from the University of Michigan's consumer sentiment survey on Friday. The focus will likely be on whether the drop in 12-month inflation expectations will prove sustainable, after the latest reading of 3.3% was the lowest since March 2021. Finally, the Producer Price Index (PPI) report is due on Thursday and economists expect a +0.2% advance, up from -0.3% in May. Earnings season will kick-off in earnest at the end of the week with a handful of major banks releasing second quarter results. In total,12 members of the S&P 500 will report throughout the week. The bar is set low heading into the quarter with consensus expectations expecting a nearly 9.0% year-over-year decline. The Fed speaking calendar will be busy with nine speeches scheduled. The Fed is also scheduled to release it’s Beige Book report on Wednesday.

— 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.