It’s a three-ring circus!
For centuries people have embraced the circus. Enjoying the sticky fluff of cotton candy while elephants, clowns and trapeze artists perform in the spotlights. Merriam Webster Dictionary defines the experience as wild, confusing, engrossing and entertaining.
Some aspects of that description apply to recent financial market activity. Last week, we saw:
With so many issues vying for attention, what should investors do? The answer is more straightforward than you might imagine: focus on their financial goals. The weight of evidence accumulated over time supports the idea that holding a well-allocated and diversified portfolio built to meet your financial goals is a sound choice. While past performance is no guarantee of future results, financial markets have weathered a variety of calamitous events – including world wars – and come through.
Last week, the Standard & Poor’s 500 Index and Nasdaq Composite gained, while the Dow Jones Industrial Average lost ground, according to Barron’s. Yields on most maturities of U.S. Treasuries finished the week higher.
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Investors aren’t happy, but stocks are up.
If you ever participated in a fantasy football league, you may have experienced a run on a position during your draft. One person picks a kicker or defense mid-round and, suddenly, almost everyone rushes to follow suit. A similar occurrence may be happening in the United States stock market.
While major U.S. stock indices are in positive territory year-to-date, market gains have been concentrated in just a few companies’ stocks. Al Root of Barron’s explained:
“Today’s five biggest stocks…have a combined market cap of about $8.7 trillion, almost 25% of the S&P 500 [capitalization (cap)] and about 3.2 times the $2.7 trillion Russell cap…What’s more, those top five stocks have returned an average of 50% in 2023, accounting for roughly 80% of the S&P 500’s 8% gain. The median stock in the index has gained less than 2%, and less than half are trading above their 200-day moving averages…The top five stocks are also expensive: They trade for an average of 31 times estimated 2024 earnings, while the index trades at 17.4 times earnings.”
The fact that five stocks have been driving market performance may be hurting investor sentiment, according to sources cited by Barron’s. Sentiment also has been affected by concerns about inflation, tightening credit conditions, the possibility of recession, and the chance the U.S. may default on its debt. Investor sentiment is the way investors feel about an asset or financial market. When investors are feeling pessimistic about stocks, stock markets tend to fall. Similarly, when investors are optimistic, stock markets tend to rise.
Bank of America’s latest survey found that sentiment among global asset managers is the most bearish it has been this year. Almost two-thirds of participants think economic growth will slow this year, although a similar number anticipate a soft landing for the global economy, reported Ksenia Galouchko of Bloomberg.
Last week, the Federal Reserve signaled the end of rate hikes was near, which pushed major U.S. stock indices higher. The indices gave back some gains on Friday after debt-ceiling talks faltered but finished the week higher overall. The yields on most maturities of U.S. Treasuries moved the week higher.
Brace yourself! The debt ceiling standoff continues.
Consumers aren’t optimistic. The Consumer Sentiment Index fell to a six-month low in May, dropping 9.1 percent month-to-month. Participants in the University of Michigan survey were:
They were wary about the outcome of debt ceiling discussions, concerned that policymakers will cause the United States to default on its debt, and apprehensive about how that could impact the economy, according to Director of Surveys Joanne Hsu.
What is the debt ceiling?
The debt ceiling is the amount of money the United States government is allowed to borrow to pay debts it has already incurred. These payments include interest on Treasuries, military salaries, Social Security and Medicare benefits, tax refunds, and other financial obligations. The debt ceiling has been lifted 78 times since 1960.
What happens if policymakers don’t raise the debt ceiling?
No one knows for certain, although many economists, analysts, and the financial press are concerned. Here’s what some have said:
“…the U.S. federal government would face various unpalatable options, ranging from delaying payments to contractors, Social Security recipients, Medicare providers or agencies; to defaults on payments on US government debt.”
—Chris Giles and Colby Smith, Financial Times, May 7, 2023
“A technical failure by the U.S. to meet its obligations would impact those Treasuries coming due most immediately. Bill markets are pricing in some risk of default in early June…A default threatens to spur big moves around the globe, with the prospect of a major economic downturn and a reassessment of Fed monetary policy potentially igniting a perverse bid for Treasury bonds on haven demand. Conversely, a resolution could shift the focus back to the outlook for inflation and the credit cycle for traders betting on whether the era of aggressive Fed interest-rate hikes has peaked.”
—Benjamin Purvis, Michael Mackenzie and Ye Xie, Bloomberg, May 13, 2023
“Potential repercussions of reaching the ceiling include a downgrade by credit rating agencies, increased borrowing costs for businesses and homeowners alike, and a drop off in consumer confidence that could shock the U.S. financial market and tip the economy into recession.”
—Noah Berman, Council on Foreign Relations, May 2, 2023
Many observers believe a deal will be reached before the June 1 deadline. “If you’re a long-term investor, there’s a strong case to do nothing. If history is a guide, a deal to avoid a default will be struck,” reported Lauren Foster of Barron’s.
Last week, major U.S. stock indices finished the week with mixed performance, reported Barron’s. The Dow Jones Industrial Average and the Standard & Poor’s 500 Index lost value, while the Nasdaq Composite gained. The yield on the one-month Treasury bill finished the week 28 basis points higher than where it started.
The labor market just keeps growing…and growing…
Last week, the April employment report for the United States arrived. It showed that unemployment dropped to the lowest level in more than 50 years – 3.4 percent. Other highlights included:
There were signs that the labor market growth might be slowing down. The number of jobs created in February and March were both revised lower.
The Federal Reserve will be weighing the strengths and weaknesses of the labor market, as well as other data, as it makes future rate hike determinations. Last week, the Fed raised the federal funds rate from 4.83 percent to 5.08 percent, and Chair Powell suggested it could be the end of the tightening cycle, reported Jeff Cox of CNBC.
“As the Federal Reserve works to rein in inflation, the labor market’s confounding durability has given central-bank officials space so far to keep interest rates in restrictive territory without having to worry about widespread layoffs or acute economic pain,” reported Barron’s.
Last week, major U.S. stock indices finished the week with mixed performance, reported Barron’s. Yields on most U.S. Treasuries moved lower over the week.
Despite more than a year of aggressive Federal Reserve rate increases, the United States economy is still growing, albeit more slowly. U.S. gross domestic product (GDP) – the value of all goods and services produced in the U.S. economy – grew by 5.1 percent over the first quarter.
You may have read or heard that real GDP increased by 1.1 percent over the first quarter. That is also true. In economics, “real” means the value of something after inflation (inflation is the rate at which prices are increasing). For example:
Last week, the Personal Consumption Expenditures (PCE) Index, which is one of the Federal Reserve’s preferred measures of price increases, showed that inflation generally continued to trend lower.
Inflation and Fed rate hikes have had less impact on company earnings than analysts anticipated. To date, 53 percent of companies in the Standard & Poor’s 500 Index have reported results for the first quarter and almost 8 of 10 have reported that earnings per share was higher than expected. Overall, S&P 500 earnings are expected to dip in the first quarter before increasing later in 2023, reported John Butters of FactSet.
Last week, major U.S. stock indices finished the week higher, according to Nicholas Jasinski of Barron’s. Yields on U.S. Treasury notes and bonds moved lower last week.