- Economic news for the week included the FOMC hiking rates by another quarter-percent, raising speculation that this might be for the final time this cycle. The employment situation report came in stronger than expected, with a falling unemployment rate, although other details were less robust. ISM services improved further into expansion, as did ISM manufacturing, although the latter remained in contraction—the mixed results reflect the uncertain prospects for recession (or not).
- Equities were mixed, with a decline in the U.S. offset by gains in foreign emerging markets. Bonds fell back, as credit spreads widened. Commodities fell back, notably in energy, largely due to concerns about the economy.
U.S. stocks lost ground on the week, despite a strong recovery attempt on Friday after perceived strength in the April employment report. Comments from Fed Chair Powell contradicted market hopes for lower rates soon, in addition to likely angst surrounding the upcoming U.S. government debt limit. By sector, technology led the way with a small gain, led by a strong report from Apple, followed by defensive health care and utilities ended the week flat; laggards included energy down -6% and financials. Real estate was down -1%.
The week began with JPMorgan’s takeover of failed First Republic Bank, meaning essentially all deposits and assets were absorbed (however that didn’t include bonds or stocks of FRB, the latter of which fell to under $2/share). JPM entered into a loss-sharing agreement with the FDIC for absorbed loans, many of which were the jumbo variety, in keeping with FRB’s wealthy clientele. Such outcomes are usually the best-case scenarios for such banks, which creates a smooth experience for customers, while avoiding the more tumultuous ends of Silicon Valley Bank and Signature Bank, where buyers couldn’t be found. Later in the week, PacWest Bancorp and Western Alliance, two medium-sized banks in the Western U.S., announced that they were looking at ‘strategic options’ (which is the new code for trouble).
Per FactSet, about 85% of S&P 500 companies have now reported Q1 quarterly earnings, with nearly 80% having positively surprised. Earnings have since improved from an initial -7% expectation to -2%; however, expectations for Q2 earnings have worsened a percent to -6%. For the full 2023 year, assumed earnings growth is hovering around 1%, implying most hopes are pinned to a recovery in 2024. While profit margins have remained higher than expected (partially due to inflation allowing for stronger pricing), not yet reverted back toward ‘normal’ levels, as they’ve been prone to do historically. However, other comments from executives noted ‘weak demand’ (the Fed has contributed to that), as well as seeking out better ‘efficiency,’ as well as greater use of ‘artificial intelligence’ (the latter isn’t surprising, as there is a need to offer the view that companies are on top of new trends, even if not necessarily useful today). Stocks have held up relatively well in recent months, with earnings not nearly as bad as the worst fears—however, as it doesn’t appear a recession is currently at hand, another quarter or two of earnings results remain at risk of disappointment.
Foreign stocks fared better than U.S. last week, with gains in Japan offsetting flattish results in Europe and the U.K. The ECB raised rates by 0.25% to 3.25%, after several straight half-percent hikes, offering some hope for a slowing in hawkish policy despite President Lagarde’s comments to the contrary. Emerging markets saw gains across the board, led by Brazil, Korea, and Taiwan, with China lagging along with manufacturing PMI falling from expansion to contraction.
Bonds fell back last week, largely due to widening spreads for corporates. Concerns over the banking sector remain the primary driver, assumed to raise the broader risks of default (which have been rising, albeit not at an extreme pace). Foreign bonds were mixed, with developed markets helped by a weaker dollar.
Commodities were mixed for the week, with gains in agriculture and precious metals offset by a sharp drop in energy. Crude oil prices fell by over -7% last week to over $71/barrel, along with natural gas dropping by -11%. Despite several catalysts for upward price movement earlier in the week, such as hijacked tankers and falling U.S. inventories, concern over the U.S. banking sector’s effects on the economy and lackluster industrial data from China weighed on sentiment.
|Period ending 5/5/2023||1 Week %||YTD %|
|Bloomberg U.S. Aggregate||-0.05||3.53|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.