Week in Review: Ho-Hum

The Nasdaq Composite closed the week with a slim gain while the S&P 500 closed with a slim loss. The 4,100 level was an important area of relative support for the S&P 500 this week. Index level price action was somewhat misleading, though, with more selling occurring under the surface. Mega cap stocks, benefitting from some flight to safety buying, held up the broader market.

The Invesco S&P 500 Equal Weight ETF (RSP) fell 1.1% this week while the Vanguard Mega Cap Growth ETF (MGK) rose 0.8%.  Alphabet (GOOG) offered a lot of support, rising 11.0% this week following its Developers Conference on Wednesday.

Market participants were digesting the April Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS) on Monday. In brief, the SLOOS confirmed what the market had already been expecting following the regional banking crisis that began in mid-March. Lending standards have tightened and banks expect to tighten standards across all loan categories over the remainder of 2023. There was knee-jerk volatility in the immediate aftermath, yet the major indices closed little changed from levels seen before the release of the SLOOS.

PacWest (PACW) was a losing standout from the bank stocks, falling another 21.0% this week after announcing that its deposits declined approximately 9.5% for the week ending May 5. PACW also cut its dividend to $0.01 per share from $0.25. The SPDR Regional Banking ETF (KRE) declined 5.2%.

Angst about the debt ceiling weighed over the broader market after Treasury Secretary Yellen warned last weekend of “economic chaos” if the debt ceiling is not raised. President Biden met with congressional leaders on Tuesday to discuss the debt ceiling, yet that did not quell the market’s worries. Reports suggested that the meeting showed no signs that they had moved closer to a deal. President Biden was supposed to meet with congressional leaders again on Friday, but that meeting was postponed until early next week as staff members continue to negotiate.

Meanwhile, market participants were reacting to the latest inflation readings in the form of the April Consumer and Producer Price Indices. Those reports largely went the market’s way, which is to say that the continued month-over-month moderation in inflation should at least spur the Fed to entertain keeping its policy rate on hold when it meets again in June.

Economic releases culminated Friday with the release of the preliminary University of Michigan Consumer Sentiment Survey for May, which featured a drop in sentiment and an increase in five-year ahead inflation expectations to 3.2% from 3.0%. That is the highest reading since 2011. Notably, the NY Fed’s Survey of Consumer Expectations for April also reflected a slight increase in three-year and five-year ahead inflation expectations.

Separately, Disney (DIS) was a drag on sentiment on Thursday after reporting fiscal Q2 results that featured a 2% year-over-year decline in Disney+ paid subscribers.

Growth concerns manifested themselves in S&P 500 sector performance. Energy (-2.2%), materials (-2.0%), and industrials (-1.2%) showing some of the steepest declines. Unsurprisingly, the financials sector was another top laggard, down 1.4%.

The communication services (+4.3%) and consumer discretionary (+0.6%) sectors were the lone outperformers to log a gain, boosted by their respective mega cap components.

The 2-yr Treasury note yield rose seven basis points to 3.98% this week and the 10-yr note yield rose one basis point to 3.46%. The U.S. Dollar Index rose 1.4% to 102.71.

Below are truncated summaries of daily action:

Monday:

The major indices had a somewhat mixed showing. The session started with a wait-and-see vibe ahead of the 2:00 p.m. ET release of April Senior Loan Officer Opinion Survey on Bank Lending Practices (SLOOS).

In brief, the SLOOS confirmed what the market had already been expecting following the regional banking crisis that began in mid-March. Lending standards have tightened and banks expect to tighten standards across all loan categories over the remainder of 2023. Furthermore, they expect credit quality to deteriorate. There was a bout of volatility initially following the SLOOS release, but the market soon steadied itself and traded back to where it was just before the release.

Ultimately, the major indices closed the session near their flat lines, sporting only modest gains or losses. Index performance was supported by gains in some mega cap stocks, driving a 0.3% gain in the Vanguard Mega Cap Growth ETF (MGK). The Invesco S&P 500 Equal Weight ETF (RSP), meanwhile, fell 0.2%.

Many of the regional bank stocks started the session in rally mode before rolling over, giving back a lot of their gains. The SPDR S&P Regional Bank ETF (KRE) had been up 2.7% Monday morning, but closed with a 2.0% loss. Notably, PacWest (PACW) closed with a gain, albeit well off its session high, despite cutting its dividend to $0.01 per share from $0.25. PACW had been up as much as 30.2% earlier.

Concerns over the debt ceiling were a distracting factor for the stock market. Over the weekend, Treasury Secretary Yellen warned of “economic chaos” if the debt ceiling is not raised, according to CNBC. Also, President Biden will meet with House Speaker McCarthy and other Congressional leaders Tuesday at 4:00 p.m. ET.

Separately, the NY Fed’s Survey of Consumer Expectations for April reflected a 0.3 percentage point decline in the one-year ahead horizon to 4.4%, yet three-year and five-year ahead inflation expectations increased by 0.1 percentage point to 2.9% and 2.6%, respectively.

Economic data was limited to the Wholesale Inventories report at 10:00 a.m. ET, which was flat in March following a prior increase of 0.1%.

Tuesday:

The stock market traded on the weaker side in front of the April Consumer Price Index Wednesday at 8:30 a.m. ET, yet losses were modest in scope. The Dow Jones Industrial Average (DJIA) and Russell 2000 at one point stretched into positive territory, showing small gains, but slipped back into red figures, joining the S&P 500 and Nasdaq there by the closing bell.

Ongoing concerns about the debt ceiling were a limiting factor due to the specter of the 4:00 p.m. ET meeting between President Biden and congressional leaders to discuss the debt ceiling.

The relative outperformance of the DJIA was fueled in part by a gain in Boeing (BA) on the news that its has received 150 firm orders for its 737 Max-10 aircraft, and options for 150 more, from Ryanair. Meanwhile, relative strength in energy shares along with some rebound action in regional bank stocks led to the relative outperformance of the Russell 2000.

U.S. economic data on Tuesday was limited to the April NFIB Small Business Optimism Index, which fell to 89.0 — a 10-year low — from 90.1. There was also some tepid trade data out of China for April, which featured an 8.5% yr/yr increase in exports and a 7.9% yr/yr decline in imports. In March, exports were up 14.8% yr/yr while imports were down just 1.4% yr/yr.

Wednesday:

Wednesday’s trade was mostly mixed. The Dow Jones Industrial Average spent most of the session in negative territory while the Nasdaq and S&P 500 outperformed, supported by gains in the mega cap space.

Price action was somewhat tepid until a rebound effort took root in the afternoon when the S&P 500 briefly slipped below the 4,100 level. Ultimately, the Nasdaq and S&P 500 closed comfortably above unchanged levels. Mega cap stocks offered integral support to the broader market, leaving the Vanguard Mega Cap Growth ETF (MGK) up 1.1% while the Invesco S&P 500 Equal Weight ETF (RSP) closed flat and the market-cap weighted S&P 500 rose 0.5%.

Alphabet (GOOG) was a big driver of the mega cap outperformance, as it rallied amidst the company’s presentation at its Developers Conference, which included updates on its AI initiatives.

Initially, market participants reacted favorably to the April Consumer Price Index (CPI), but a closer look fostered uncertainty about the Fed’s policy path. Total CPI was up 4.9% year-over-year in April, down from 5.0% in March, which marks the sub-5.0% reading in two-years. Core-CPI, which excludes food and energy, was up 5.5% year-over-year in April, down from 5.6% in March.

Presumably, the April CPI report will sway the Fed to entertain holding the target range for the fed funds rate steady at 5.00-5.25% at its June meeting, but importantly, a 5-handle on core-CPI isn’t going to sway the Fed to think it needs to cut rates anytime soon.

That understanding, along with ongoing concerns about the debt ceiling and a possible hard landing for the economy, kept the market in check through most of the session.

Reviewing Wednesday’s economic data:

• The weekly MBA Mortgage Applications Index rose 6.3% with refinancing applications jumping 10% and purchase applications rising 5%.
• Total CPI was up 0.4% month-over-month and up 4.9% year-over-year, versus up 5.0% in March. Core-CPI, which excludes food and energy, was also up 0.4% month-over-month (Briefing.com consensus +0.3%) and up 5.5% year-over-year, versus up 5.6% in March.
• The index for shelter (+0.4%) was the largest contributor to the increase in total CPI and core-CPI; however, the 0.4% increase was the smallest increase for the shelter index since January 2022.
  • The key takeaway from the report as far as the market is concerned is that the moderation in inflation, coupled with the moderation in the shelter index, should at least spur the Fed to entertain keeping its policy rate on hold when it meets again in June.
• The weekly EIA crude oil inventories data showed a build of 2.95 million barrels after last week’s draw of 1.28 million barrels.
• The April Treasury Budget showed a surplus of $176.2 billion compared to a surplus of $308.2 billion in the same period a year ago. The Treasury Budget data is not seasonally adjusted so the April 2023 figure cannot be compared to the March 2023 figure. The surplus in April was the result of receipts ($638.5 billion) exceeding outlays ($462.3 billion).
  • The key takeaway from the report is that individual income and corporate tax receipts combined were $461.5 billion, which was 32.3% less than April 2022.

Thursday:

The major indices closed in mixed fashion near their highs of the day, yet the underlying market was quite a bit weaker than index level performance suggested. Growth concerns sparked some flight to safety buying interest in the mega cap stocks, which drove a lot of the index level action.

Alphabet (GOOG) continued to rally after its Developers Conference on Wednesday, logging some of the biggest gains for the mega caps. Amazon.com (AMZN), Meta Platforms (META), and Tesla (TSLA) all rose more than 1.0% while Apple (AAPL) closed with a slim gain. The Vanguard Mega Cap Growth ETF (MGK) rose 0.2%. Coincidentally, the Nasdaq Composite also gained 0.2% while the Nasdaq 100 gained 0.3%.

The Invesco S&P 500 Equal Weight ETF (RSP), though, fell 0.5%. Decliners led advancers by a greater than 2-to-1 margin at the NYSE and a slightly less than 2-to-1 margin at the Nasdaq.

A sizable loss in Disney (DIS) weighed on general sentiment, leading the Dow Jones Industrial Average to underperform the other major indices. Disney reported fiscal Q2 results that featured a 2% year-over-year decline in Disney+ paid subscribers.

In addition to growth concerns and disappointing results from Disney, uncertainty about the debt ceiling and ongoing pressure on regional bank stocks loomed over the broader market. PacWest (PACW) saw another sharp decline after the company said its deposits declined approximately 9.5% for the week ending May 5. The SPDR S&P Regional Bank ETF (KRE) fell 2.5% and the SPDR S&P Bank ETF (KBE) fell 1.6%.

Reviewing Thursday’s economic data:

• April PPI 0.2%; Prior was revised to -0.4% from -0.5%; April Core PPI 0.2%; Prior was revised to 0.0% from -0.1%
  • The key takeaway from the report is that producer inflation continued to moderate. On a year-over-year basis, total PPI was up 2.3% versus up 2.7% in March. Excluding food and energy, PPI was up 3.2% versus 3.4% in March.
• Weekly Initial Claims 264K; Prior 242K; Weekly Continuing Claims 1.813 mln; Prior was revised to 1.801 mln from 1.805 mln
  • The key takeaway from the report is that initial claims reached their highest level since October 30, 2021, tracking in a direction that reflects a labor market that is becoming less tight.

Friday:

The stock market started the day on a more upbeat note. For most of the session, though, index level price action was negative. There was a late afternoon bounce after the S&P 500 briefly slipped below the 4,100 level, leaving the major indices with only modest losses on a lightly traded day.

Mega cap stocks had been supporting the broader market for most of the week, yet money flows reversed somewhat on Friday. The Vanguard Mega Cap Growth ETF (MGK) fell 0.3% while the Invesco S&P 500 Equal Weight ETF (RSP) closed flat and the market-cap weighted S&P 500 fell 0.2%.

Market breadth showed somewhat mixed action under the index surface. Decliners had only a slim lead over advancers at both the NYSE and the Nasdaq.

S&P 500 sector performance was also mixed with many of the sectors closing near their flat lines. The consumer discretionary (-0.9%) sector was the worst performer due to losses in Amazon.com (AMZN) and Tesla (TSLA). Meanwhile, lingering growth concerns led to the relative outperformance of the defensive-oriented utilities (+0.4%) and consumer staples (+0.3%) sectors.

Reviewing Friday’s economic data:

• April Import Prices 0.4%; Prior was revised to -0.8% from -0.6%
• April Import Prices ex-oil 0.0%; Prior -0.5%
• April Export Prices 0.2%; Prior was revised to -0.6% from -0.3%
• April Export Prices ex-ag. 0.2%; Prior was revised to -0.5% from -0.2%
  • The key takeaway from the report is that it follows suit with the April CPI and PPI reports from earlier in the week, which showed a moderation in inflation pressures on a year-over-year basis.
• May Univ. of Michigan Consumer Sentiment – Prelim 57.7; Prior 63.5
  • The key takeaway from the report is that consumer sentiment has weakened amid concerns about the economic outlook, which threatens to curtail discretionary spending activity that, in turn, would weigh on growth.

Source: Briefing Investor

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