Market Update: May 30, 2023

Photo by Mike Hindle on Unsplash

Economic data for the week included a revision higher for Q1 GDP, as well as reported gains in personal income, personal spending, and durable goods. New home sales also saw an increase, while jobless claims reset from recent unusual filing activity. 

Global equity markets featured gains in the U.S., offset by declines in developed foreign markets. Bonds fell back as persistent inflation raised odds of another Fed rate hike. Commodities were mixed, with demand and supply conditions in energy seemingly in balance. 

U.S. stocks were mixed last week, led by technology (up nearly 5%, on the heels of a 25% rise in Nvidia), and a smaller gain in communications. All other sectors were down for the week, led by -3% drops in materials, staples, and health care. Real estate also fell back a percent. 

During the weekend, a debt ceiling deal (lifting it into 2025) was reached, but is hinged on enough Congressional votes being gathered. The debate over the ceiling had continued through last week, with Treasury Secretary Yellen’s warning of an early June deadline clearly in the minds of investors. (By Friday, Yellen had extended the original ‘X-date’ of June 1 to June 5.) The negotiation between the Democratic White House/Senate and Republican House began to ramp up to dominate market sentiment throughout the week, in contrast with fewer apparent concerns in preceding weeks. Despite several starts and stops, leaders have appeared to remain confident of a deal getting done, as technocrat staffers increasingly took charge of the details. In fact, President Biden’s change in stance from ‘no negotiation’ to ultimately being open on including spending limits was the most dramatic example of how conditions had evolved. The final wild card is focused on the most conservative and progressive Congressional members, who remain steadfast to more stringent budget-reducing requirements and no negotiated changes, respectively. Debt ceiling aside, the two parties remain far apart on a host of other issues related to policy and spending, which points to few areas of common ground until at least the 2024 election. It’s only the risk of financial catastrophe from a potential default that’s bringing them together now. 

The strong earnings results and future expectations from Nvidia on Thurs. coincided with a mini-frenzy about the potential for artificial intelligence (AI), for which they’re a leader in hardware and software applications. This has helped push market sentiment for growth stocks higher. However, this could be more of a ‘fear of missing out’ than on tangible revenue-generating products, at least at this early stage, with some naysayers comparing this to the euphoria of the late 1990s when anything to do with the new concept of the internet saw rising interest. These pockets of strong sentiment have been a sporadic tendency for growth stock investors over the past decade, as strong fundamentals and still-attractive revenue growth potential have kept major stocks on the radar consistently. Expectations for a peak in yields this year along with atrocious performance for growth stocks in 2022 have also stoked interest. The drawback in several cases, though, is the higher valuations, at least relative to ‘value’ stocks, which remain discounted by a variety of metrics compared to long-term average comparatives. 

Foreign stocks underperformed U.S. stocks on the week, although emerging markets outperformed developed with a flattish reading. European equities in particular lagged as economic indicators there have taken a negative turn. In fact, Germany was deemed to have fallen into at least a minor recession, with -0.3% Q1 growth following a Q4 -0.5% figure. At the same time, strong inflation continues to keep central bank policy hawkish in Europe and the UK for the foreseeable future, creating a dilemma. In EM, gains in India, South Korea, and Taiwan offset a sharp drop in China—which continues to experience concerns over weaker-than-expected economic reopening growth. The Chinese also placed a ban on the purchase of Micron Technology’s chip products, which continues the geopolitical tensions surrounding technology. 

Bonds lost ground last week as interest rates ticked higher in keeping with sticky inflation results. Sentiment also soured a bit as investors digested mixed messages about a potential Fed rate hike in June. (Odds favored a pause after the May meeting, but have been drifting higher recently, now to about a 2/3 chance of another 0.25% move.) All bond groups were negative, with high yield and bank loans mildly outperforming longer duration treasuries, due to lower duration and higher coupons. Coinciding with debt ceiling stress were yields on T-Bills maturing in early June rising to over 7% briefly last week. Treasury yields have drifted higher generally over the past month, which appears largely due to lower recession risks and higher growth expectations, although the non-zero default probability related to the debt ceiling negotiations may also be playing a role. Developed market foreign debt fell over a percent along with a sharp rise in the dollar for the week. 

Commodities were mixed, with gains in agriculture and energy offset by declines in metals. Crude oil rose over a percent on the week to just under $73/barrel (with Saudi Arabia hinting at production cuts), offset by a -10% drop in natural gas (due to a combination of weaker weather-related demand, and high inventories). Energy remains challenged year-to-date, with crude oil down -10% and natural gas down -45%, as concerns over weaker-than-expected economic growth have held down demand expectations. Storage levels in Europe remain high, which inspires confidence in the event of a potentially warmer summer and needs for next winter, albeit far off. 

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.