The major indexes were lower in a holiday-shortened trading week as the S&P 500 ended a five-week streak of weekly gains, and the Nasdaq ended an eight-week streak. Sector performance was mixed, as healthcare and consumer discretionary were the top outperformers, and real estate and energy were the top underperformers. Growth stocks outperformed value shares, while large-caps fared better than small-caps. Longer-term U.S. Treasury yields ended roughly unchanged and traded in a narrow band over the week. Municipal bonds outperformed over much of the week, helped by strong demand for higher-yielding new issues. Sales from the Federal Deposit Insurance Corporation (FDIC) of recently acquired assets from distressed banks were also strongly bid. The curve flattened, as the 2-year to 10-year spread fell close to 100 basis points. The dollar index increased 17%, reaching its highest point in a year. Concerns about economic growth and energy demand weighed on crude oil price, which fell nearly 4% for the week. U.S. crude fell below $70 per barrel on Thursday, and Friday’s price of around $69 was down almost 17% from a high recent high on April 12.
Last week’s housing market data surprised to the upside, but analysts don’t expect this positive momentum to continue the second half of the year. Existing home sales increased slightly to 4,300,000 in May, showing resilient demand despite low inventory and high mortgage rates above 6%. Median home prices also increased in May on a monthly basis due to seasonal factors, but fell 3.1% year-over-year (YoY), the largest yearly decline since December 2011. It is expected sales to slow down in upcoming months as economic growth slows and the labor market weakens. Affordability remains the main problem. Leading economic indicators continue to forecast an economic slowdown. The Conference Board’s Leading Economic Index (LEI) declined by 0.7% in May, its lowest level since July 2020 and 14th consecutive monthly decline. This decline was driven by low consumer expectations, weak new orders, and tight credit conditions. Although economists expect the economy to have mild growth in Q2, they expect growth will slow materially later this year and into 2024, given slowing LEI, high interest rates and Fed’s wording that will raise rates further this year, keeping credit conditions tight. In prepared testimony before Congress on Wednesday and Thursday, Fed Chair Jerome Powell stated that “nearly all policymakers believe that it will be appropriate to raise interest rates further by the end of the year.” Indeed, the Fed’s latest Summary of Economic Predictions revealed that a majority of those expect at least two more quarter-point rate hikes in the coming year, on the other hand futures markets continued to predict that was unlikely. Labor market conditions show signs of weakness. Initial jobless claims were unchanged at 264,000 in the week ending in June. Initial claims were revised higher for the week prior, increasing the four-week claims moving average to 256,000, the highest level since November 2021. It is expected jobless claims will rise throughout 2023, as high interest rates further weaken consumer and economic growth.
In the United Kingdom, the Bank of England raised interest rates by 50 bps, bringing its target rate to an almost 15-year high of 5% from 4.5%. Economists suspect the BoE will continue hiking interest rates, with at least one rate hike in upcoming months due to persistently high inflation, particularly in the service. We expect most global central banks will continue their hawkish tone, keeping rates higher for longer to slow inflation. In euro terms, the STOXX Europe 600 Index fell 2.93% on worries that further interest rate increases might cause a recession in Britain and the eurozone. A disappointing economic recovery in China and hawkish statement by the Fed contributed to the downturn. Major stock indexes underperformed, with Germany’s DAX dropping 3.23%, France’s CAC 40 Index sliding 3.05%, and Italy’s FTSE MIB losing 2.34%. The UK’s FTSE 100 Index declined 2.37%. Recession fears pushed European government bond yields lower. Purchasing manager surveys showed private sector business activity has slowed significantly, weighing on 10-year German bond yields.
Japan’s stock markets retreated from their 33-year highs, with the Nikkei 225 Index falling 2.7% and the broader TOPIX Index finishing the week 1.6% lower. Some of the declines were attributable to profit-taking following the markets’ strong year-to-date performance. Japan’s hot May core consumer inflation print weighed on sentiment, and fueled speculation that the Bank of Japan would revise upward its inflation forecasts in July. Japan’s core consumer price index (CPI) rose by 3.2% year on year in May, more than forecast; the number slowed from the previous month but remained well above the BoJ’s 2.0% inflation target. The yen weakened to about JPY 143.1 against the U.S. dollar from about JPY 141.8 previously. Chinese stocks retreated after a holiday-shortened week as investor turned negative due lack of stimulus measures to boost post-pandemic recovery. The Shanghai Stock Exchange Index fell 2.3%, while the blue-chip CSI 300 gave up 2.51%. In Hong Kong, the benchmark Hang Seng Index declined 5.74%, its biggest drop in three months. Chinese banks lowered their one- and five-year loan prime rates by 10 basis points for the first time since August 2022 as expected, after the People’s Bank of China (PBOC) cut its medium-term lending facility rate last week.
According to FACTSET the regular Q2 earnings season doesn't begin for about three more weeks. However, since not all companies follow a regular reporting calendar, this week four S&P 500 companies reported Q2 earnings and four of them beat consensus EPS expectations. “Overall, there are 10,981 ratings on stocks in the S&P 500. Of these ratings, 54.8% are Buy ratings, 39.6% are Hold ratings, and 5.6% are Sell ratings. The percentage of Buy ratings is above the 5-year (month-end) average of 54.2%, while the percentages of Hold ratings and Sell ratings are below their 5-year (month-end) averages of 39.7% and 6.1%, respectively.”
Equity and bond markets will continue to experience elevated volatility until there’s a meaningful and consistent decrease in inflation, and the duration of higher rates is more certain. 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, since China’s evolving COVID policies continue to weigh on manufacturing and growth. We’ve recently become more constructive on Developed 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.