Week in Review: Strong Quarter-End [Mar. 31-23]

It was a strong week, and first quarter, for the stock market. The S&P 500 spent most of the week above its 50-day moving average and climbed past the 4,100 level by Friday’s close.

The major indices stuck to a decidedly narrow range in the first half of the week, though, as investors weighed the latest developments in the recent banking sector fallout, which included a two-day Congressional hearing on the SIVB bank failure.

Participants reacted favorably to news that First Citizens Bancshares (FCNCA) will acquire some of Silicon Valley Bank’s assets along with a Bloomberg report indicating that authorities are considering expanding an emergency lending facility for banks in ways that would give First Republic Bank (FRC) more time to shore up its balance sheet. Bank stocks remained under pressure, though, after FDIC Chairman Michael Barr told the Senate Banking Committee that he anticipates having to increase capital and liquidity standards for firms over $100 billion, adding that more regulation is needed.

Still, price action indicated that worries about the health of the banking sector had dissipated somewhat. The S&P 500 financial sector rose 3.7% this week, but it declined 6.1% in Q1.

Some of the gains this week were driven by relatively strong leadership from semiconductor stocks. The PHLX Semiconductor Index rose 3.5% this week and surged 27.6% this quarter. Investors initially reacted favorably to Micron’s (MU) earnings report, but sold shares on Friday due to reports that Chinese regulators are conducting a cybersecurity review of MU products.

The rally really picked up steam on Friday after investors received relatively pleasing inflation data. Briefly, the PCE Price Index slowed to 5.0% yr/yr in February from 5.3% in January while the core-PCE Price Index, the Fed’s preferred inflation gauge, dipped to 4.6% from 4.7%. The direction of these moves is a welcomed development, but the pace at which these indices are decelerating leaves a bit to be desired.

All 11 S&P 500 sectors logged gains this week. Energy (+6.2%), consumer discretionary (+5.6%), and real estate (+5.2%) were the top performer while communication services (+1.5%) and health care (+1.8%) showed the slimmest gains.

The 2-yr Treasury note yield rose 29 basis points this week to 4.06% and the 10-yr note yield rose 11 basis points to 3.49%.

The U.S. Dollar Index fell 0.6% to 102.52. On a currency related note, China and Brazil agreed to trade in their own currencies instead of the U.S. dollar.

Below are truncated summaries of daily action:

Monday:

The new week got started on a mixed note after the weekend went by without additional worrisome news from the banking sector. Instead, sentiment around the bank industry shifted Monday after investors learned that First Citizens Bancshares (FCNCA) will acquire $72 bln of Silicon Valley Bank’s assets at a discount of $16.50 bln.

Market participants were also reacting to a Bloomberg report indicating that U.S. authorities are considering expanding an emergency lending facility for banks in ways that would give First Republic Bank (FRC) more time to shore up its balance sheet.

Despite relative strength from the banking sector, the S&P 500 and Dow Jones Industrial Average closed with only slim gains while the Nasdaq was pinned in negative territory at the close. The main indices were feeling the weight of lagging mega cap stocks, which helped drive a 0.7% loss in the Vanguard Mega Cap Growth ETF (MGK) versus a 0.7% gain in the Invesco S&P 500 Equal Weight ETF (RSP).

There was no U.S. economic data of note on Monday.

Tuesday:

Tuesday’s price action occurred in a relatively tight trading range on below average volume. The main indices closed with modest declines after climbing off their worst levels in the afternoon trade. The Nasdaq trailed its peers again Tuesday, weighed down by lagging mega cap stocks.

In the early going, money flows looked somewhat similar to Monday’s trade with bank stocks leading the market higher. Sentiment seemed to shift, though, around the time that FDIC Chairman Michael Barr told the Senate Banking Committee that he anticipates having to increase capital and liquidity standards for firms over $100 billion, adding that more regulation is needed.

Still, there was some underlying strength in the market as evidenced by the 0.2% gain in the Invesco S&P 500 Equal Weight ETF (RSP) versus the 0.2% decline in the market-cap weighted S&P 500.

Reviewing Tuesday’s economic data:

• The advanced report for international trade in goods showed a $91.6 billion deficit in February versus the prior revised $91.1 billion deficit in January (-$91.5billion). The advanced report for retail inventories reflected a 0.8% build in February following a 0.1% increase in January. The advanced report for wholesale inventories showed a 0.2% build in February after a revised 0.5% decline in January (from -0.4%).
• The FHFA Housing Price Index rose 0.2% in January following a 0.1% decline in December. The S&P Case-Shiller Home Price Index rose 2.5% in January following a 4.6% increase in December.
• The Conference Board’s Consumer Confidence Index for March hit 104.2 versus an upwardly revised 103.4 (from 102.9) for February. In the same period a year ago, the index stood at 107.6.
  • The key takeaway from the report is that consumer confidence held up well even though the survey period covered the week after Silicon Valley Bank collapsed. That said, the Expectations Index remained below 80.0 for the 12th month out of the last 13, which serves as a concerning signal about future growth.

Wednesday:

Wednesday’s trade had a decidedly positive tone following the two-day Congressional hearing on the SIVB bank failure. For most of the session, the main indices chopped around a fairly narrow range, albeit sporting nice gains. Ultimately, though, a late afternoon push higher had the main indices close near their highs of the day, leaving the S&P 500 above its 50-day moving average (4,014).

The tech-heavy Nasdaq paced its peers thanks to strong leadership from mega caps and chipmakers. Investors reacted favorably to Micron’s (MU) quarterly results and many semiconductor stocks traded up in sympathy. The PHLX Semiconductor Index rose 3.3% today.

Strength from semiconductor components helped drive a 2.1% gain in the S&P 500 information technology sector, which closed near the top of the leaderboard along with real estate (+2.3%) and consumer discretionary (+1.9%).

Notably, the positive price action Wednesday followed relatively strong gains in many overseas indices. Germany’s DAX rose 1.2%, the U.K.’s FTSE rose 1.1%, and France’s CAC 40 rose 1.4%. Market participants were reacting to the news that UBS AG (UBS) named Sergio P. Ermotti as CEO, effective April 5.

Reviewing Wednesday’s economic data:

• The weekly MBA Mortgage Applications Index rose 2.9% with purchase application jumping 2.0% (-35% yr/yr) while refinancing applications rose 5.0% (-61% yr/yr).
• Pending home sales rose 0.8% in February following a 8.1% increase in January.
• The weekly EIA Crude Oil Inventories showed a draw of 7.49 million barrels following last week’s draw of 1.06 million barrels.

Thursday:

Thursday’s trade started on an upbeat note following yesterday’s pleasing price action. Initially, the main indices all logged decent gains paced by the Nasdaq thanks to relative strength from chipmakers and mega cap stocks.

Early momentum dissipated, though, and the main indices slowly declined, hitting their session lows around midday. The downturn was attributed to renewed selling pressure in the banking sector, indicating that concerns about additional fallout remain in play for investors. The SPDR Regional Bank ETF (KRE) fell 2.0% and the SPDR Bank ETF (KBE) lost 1.5% Thursday.

Unsurprisingly, the S&P 500 financial sector (-0.3%) was the worst performer today. It was the only sector to close with a loss, partially weighed down by the recently embattled First Republic Bank (FRC). Charles Schwab (SCHW) was another top laggard for the sector after being downgraded to Equal Weight from Overweight at Morgan Stanley.

Following the midday dip, the main indices bounced and closed near their best levels of the day. The S&P 500 was able to extend its position above its 50-day moving average (4,017). Fortunately, buying interest in chipmakers and mega cap stocks remained fairly robust. The PHLX Semiconductor Index rose 1.6% and the Vanguard Mega Cap Growth ETF (MGK) rose 0.8%.

Reviewing Thursday’s economic data:

• Initial jobless claims for the week ending March 25 increased by 7,000 to 198,000 while continuing jobless claims for the week ending March 18 increased by 4,000 to 1.689 million from last week’s revised level of 1.685 million (from 1.694 million).
  • The key takeaway from the report is that claims remain at a stable level near the 200,000 mark, suggesting little recent stress in the labor market.
• The third estimate for fourth quarter GDP showed a slight downward revision to 2.6% from 2.7% reported in the second estimate. The lowered estimate was owed to downward revisions to exports and consumer spending. The GDP Price Deflator was left unrevised at 3.9%. The personal consumption expenditures index was left unrevised at 3.7% while the core-PCE Price Index was revised up to 4.4% from 4.3% in the second estimate.
  • The key takeaway from the report is that it continues pointing to above-potential growth and inflation that remains above target, which the Fed could use as an argument for additional rate hikes.
• The weekly EIA Natural Gas Inventories showed a draw of 47 bcf versus a draw of 72 bcf last week.

Friday:

The stock market closed out the final session of Q1 with sizable gains. The main indices moved up right out of the gate and spent most of the day inching higher. A sharp upside move in the late afternoon had the S&P 500 close above the 4,100 level.

The positive disposition Friday followed some relatively pleasing inflation data Friday morning. Briefly, the PCE Price Index slowed to 5.0% yr/yr in February from 5.3% in January while the core-PCE Price Index, the Fed’s preferred inflation gauge, dipped to 4.6% from 4.7%. The direction of these moves is a welcomed development, but the pace at which these indices are decelerating leaves a bit to be desired.

Investors were also reacting to the Michigan Consumer Sentiment survey for March, which showed that year-ahead inflation expectations slowed to 3.6% from 3.8% in the preliminary reading and 4.1% in the final February reading.

Strength from the mega cap space had an outsized influence on index level performance Friday and throughout Q1. The Vanguard Mega Cap Growth ETF (MGK) rose 1.8% versus a 1.5% gain in the Invesco S&P 500 Equal Weight ETF (RSP) and a 1.4% gain in the market-cap weighted S&P 500. The MGK rose 18.9% this quarter versus a 2.4% gain in the RSP.

Reviewing Friday’s economic data:

• February Personal Income 0.3%; Prior 0.6%; February Personal Spending 0.2%; Prior was revised to 2.0% from 1.8%; February PCE Prices 0.3%; Prior 0.6%; February PCE Prices – Core 0.3%; Prior was revised to 0.5% from 0.6%
  • The key takeaway from the report is that it only showed a slight deceleration in the yr/yr PCE and core-PCE price indices, which gives the Fed an argument to continue hiking rates.
• March Chicago PMI 43.8; Prior 43.6
• March Univ. of Michigan Consumer Sentiment – Final 62.0; Prior 63.4
  • The key takeaway from the report is that the failure of Silicon Valley Bank had a limited impact on sentiment, which had already been pressured by growing concerns about a potential recession. On a positive side, year-ahead inflation expectations receded to 3.6% from 4.1% in February.

Source: Briefing Investor