U.S. equities were mostly lower this week; the major U.S. stock indexes didn’t make any big movements. The S&P 500 slipped -0.16%, the NASDAQ gain +0.4%, and the Dow retreated approximately -1.11%. Big Tech companies generated a boost for the Nasdaq and provided a support for the S&P 500. Financials stocks underperformed, dragged lower by ongoing concerns over the problems facing certain regional banks. Since the start of April, the major U.S. indexes have continued to trade in a narrow range as quarterly earnings season has progressed. The S&P 500’s highest closing level during that period was 4,169 points on April 28—less than 3% above its low point of 4,056 two days earlier. On Friday, it closed at 4,124. An index of U.S. small-cap stocks lagged its large-cap peers in the latest week, extending the asset class’s run of year-to-date underperformance. The Russell 2000 Index finished down about 1% for the week and is down about the same amount since the end of 2022.
Treasuries ended weaker with a bit of curve flattening after a volatile week in short-term yields, the 10-year Treasury note yield inched up 2 basis points to 3.46%. The European Central Bank is in the final leg of its of interest-rate increases cycle according to Vice President Luis de Guindos. The ECB official position is that possible future steps will depend on data and be decided on a meeting-by-meeting basis. The ECB has raised borrowing costs by 375 basis points since July to tame inflation.
Oil was weaker, with West Texas Intermediate crude settling down by -1.82% and the Brent by -1.5%, fourth consecutive weekly decline for the grade as concerns increased on how slower growth will impact demand. OPEC's last production cut—a surprise in late March—was designed to increase energy prices and profits but it lasted for about two weeks. The next OPEC meeting isn't until early June. OPEC's cuts might not hurt consumers much at the pump considering U.S. summer gasoline demand is expected to average 6% below the prepandemic norm, according to industry trade site Oilprice.com.
The week’s economic calendar was relatively light but included highly anticipated inflation data. On Wednesday, the S&P 500 Index jumped 1% in premarket trading after the Labor Department reported that April’s Consumer Price Index (CPI) rose by 0.4% month over month and 4.9% year over year at the headline level. The largest contributors to the increase were higher prices for shelter, gasoline, used cars and trucks. The positive was that headline CPI has fallen under 5% for the first time in the past two years, it’s clear that inflation is moving toward the Fed’s 2% inflation goal. While inflation pressures are easing, headline inflation around 5% still pressures the Fed to keep rates higher for longer. We expect that inflation will continue to moderate in 2023 but take some time to get closer to the Fed’s 2% goal. Energy prices rose by 0.6% month over month in April, boosted by a 3% increase in gasoline prices. Food prices were unchanged for a second straight month. Food-at-home prices fell by 0.2% MoM in April, continuing to decline as supply chain issues wane, but were offset by a 0.4% increase in food-away-from-home prices. Core CPI (excluding food and energy) rose by 0.4% month over month in April, We expect the price of goods to continue to moderate throughout 2023 as consumer demand weakens and supply issues ease.
This week’s labor market data shows signs that the labor market is moderating, which is an improvement for the Fed. Initial jobless claims rose to 264,000 during the week ending on May 6, the highest amount since October 2021. Last week, U.S. Treasury Secretary Janet Yellen announced that there’s a risk the U.S. government will be unable to fulfil its financial obligations after June 1 without increasing the debt ceiling. We believe that ultimately will be a deal; however, the process will not be smooth but rather bumpy. Long-term investors should ignore the noise and remain committed to their financial plan.
To date, 92% of the companies in the S&P 500 have reported earnings for the first quarter. Of these companies, 78% have reported EPS above the mean EPS estimate, which is above the 10-year average of 73%. It is also the highest percentage of S&P 500 companies reporting a positive EPS surprise since Q3 2021. In aggregate, earnings have exceeded estimates by 6.5%
Equity and bond markets will experience elevated volatility until there’s a meaningful and consistent decrease in inflation, and the duration of higher rates is more certain, and “data-dependent” Fed sees the effects of rate hikes. We remain defensive in our positioning, and we’d look for opportunities to upgrade portfolios during market weakness. Within equities, we continue to favor U.S. Large Cap exposure, we abstain from emerging markets since China’s recent economic data are disappointing economists on manufacturing and growth. Recent figures have provided evidence that the economy’s momentum, which till now had been driven by the pent-up demand is cooling. We’ve recently become more constructive on Developed International equities, as the energy recession wasn’t as severe as anticipated. In the United States, large-cap equities provide an attractive blend of quality, yield, and growth at a reasonable value, even though earnings expectations continue to deteriorate. For fixed income, we recommend an overweight to short- and longer-dated bonds. We remain defensive in our credit positioning and higher in credit quality.