Market Update: May 23, 2023

Photo by Alexander Grey on Unsplash

Economic data for the week included increases in retail sales and industrial production, mixed regional manufacturing and housing results, and a decline in jobless claims. 

Global equities were higher for the week, with an absence of negative economic data, with a stronger dollar dampening foreign stocks a bit. Bonds lost ground due to rising interest rates. Commodities were led higher by stronger crude oil and natural gas prices. 

U.S. stocks were higher overall on the week, with sentiment increasingly tied to U.S. debt limit negotiations. Signs of positivity mid-week were followed by less enthusiasm by Friday as plans hit a ‘pause.’ It appears that Congress and the President have been ramping up efforts to find a debt ceiling deal, with a rising consensus the Treasury will exhaust funds in early- to mid-June. That said, while the meeting frequency is ramping up, and the President appears to be shortening an upcoming Asia trip to work on this, a final deal does not seem imminent yet. Democrats have even attempted a ‘discharge petition,’ with an attempt to gather the support of moderate Republicans; however, the unique requirements make it less likely to succeed. Unlike prior episodes, though, stock market volatility during this debt episode has been muted, although signs of progress did help the market upward mid-week. 

By sector, ‘growth’ segments technology, communications, and consumer discretionary seeing gains, as well as financials with risks there appearing to fade (again). Defensive sectors utilities, consumer staples, and health care lagged with negative returns. Real estate also declined -2% along with higher interest rates. Disappointing results and guidance from Home Depot pulled sentiment down, in the first year-over-year sales decline in nearly 15 years. It was an inevitable acknowledgement that the home-spending of the pandemic economy has now rolled over more toward normalcy. 

Comments from Fed Chair Powell noted that policy remains restrictive, with risks of doing too much versus too little were generally ‘balanced,’ and that decisions will be made meeting to meeting. (While decisions are always made meeting to meeting, this time it implies the set tightening ‘path’ is no longer in place.) However, these comments were taken by markets as a bit hawkish, as further hikes are still on the table, a view that other Fed members have shared, with inflation remaining where it is. All in all, a pause in June still appears to be the base case. 

Foreign stocks were positive, albeit to a lesser degree than in the U.S., with the headwind of a stronger U.S. dollar. Japan fared slightly better, while the U.K. did a bit worse, with some industrial indicators in Europe falling further—fueling recession fears. Many emerging market nations were flattish on the week, with strong gains in South Korea and Taiwan, offset by nearly a -10% drop in Turkey. Markets were a bit surprised by the Turkish election of the prior weekend turning into an upcoming run-off between President Erdogan and a key opposition candidate wanting a move back toward a less secular state, and one that would pivot back toward the West and away from Russia; later polls showed the current President holding a lead. Investors continue to be somewhat concerned over Chinese economic data not recovering as sharply from the pandemic reopening as first hoped.  

Bonds suffered negative returns last week as yields climbed across the yield curve, driven by the absence of negative economic data and fall in jobless claims. High yield and floating rate bank loans outperformed treasuries and investment-grade corporates. Foreign bonds were held back by a rally in the dollar. 

Commodities were also mixed, with gains in energy offset by declines in agriculture and precious metals. Crude oil rose over 2% last week to $72/barrel, while natural gas prices surged 11%. Both appeared to be somewhat affected by wildfires in Alberta, Canada, which have taken up to 300k barrels/day out of production, in addition to a drop in the number of U.S. gas drilling rigs. 

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.